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Tax Cuts and Jobs Act: 2018 Tax Overhaul

Last week, President Trump signed a bill into law that will bring the most comprehensive overhaul to the United States tax system since 1986. The expressed goals were to lower the corporate tax rate and simplify the tax system. The former was certainly realized by a reduction of the corporate tax rate from a top tax rate of 35% to a top tax rate of 21%. As for the latter goal, there will be simplification for some taxpayers, but overall there will be lots of complexity to parse through in the over 700 page bill. This article is intended to be a brief overview of the important changes implemented in this new law, as well as to provide suggestions for things you can do before it becomes effective January 1. Our goal is to have more detailed articles in future newsletters throughout 2018 relating to specific tax issues.

Over the last couple of weeks, as the provisions of the bill became more clear, the question we were asked the most is “what should I do before year end?”. Unfortunately, because we are lawyers, the answer was often “it depends”. Although there is not much time left in 2017, if you have the opportunity, you should speak with your accountant and see if any of the following will benefit you:

  • Prepay some or all of your 2018 property tax bill;
  • Defer income recognition until 2018;
  • Prepay charitable contributions that you intend to make in 2018; and
  • Pay your January mortgage payment in December.

The caveat for any of the above actions being that if you are subject to the Alternative Minimum Tax for 2017, you may not receive many benefits from prepayment of expenses, which is why it is important to speak to your accountant.

Once you have done what you can for your 2017 taxes, it is important to understand the changes to the current law. Again, we will be delving into greater detail in future articles, but the remainder of this article will explore the significant changes to the new tax law and some of the provisions that have remained the same.

Remaining the Same:

The current long-term capital gains rates, which also apply to dividend income, remain the same. Taxable interest and short-term capital gains rates are the same (a top rate of 20%, plus Net Investment Income surcharge of 3.8%). Popular credits such as the Earned Income Tax Credit, the Adoption Tax Credit, Education Tax Credits (American Opportunity, Lifetime Learning and Hope Scholarship Credits), as well as deductions for student loan interest and teacher’s classroom expenses under $250 remain in place for 2018.

Most deductions are altered as described below, but the charitable contribution deduction remains in place for those taxpayers that itemize. The Alternative Minimum Tax (“AMT”) also remains, but the income threshold has been increased, so that fewer individuals will be subject to AMT.

It is also important to note that Massachusetts taxes remain the same. This is especially pertinent in the estate tax arena, where the Massachusetts estate tax exemption remains $1 million per person.

Changes for 2018:

There are many changes in the tax law, here are some highlights:

Tax IssueOld LawNew Law
Individual Tax Rates7 Brackets
10%, 15%, 25%, 28%, 33%, 35%, 39.6%
7 Brackets
10%, 12%, 22%, 24%, 32%, 35%, 37%
Standard Deductions$6,500/$13,000
Personal Exemption$4,150/Taxpayer and DependentsEliminated
State and Local Tax (SALT) Deductions: Property and Income TaxUnlimited Itemized DeductionDeduction limited to $10,000
Mortgage Interest DeductionInterest Payments Deductible on Mortgages up to $1 millionInterest Payments Deductible on Mortgages up to $750,000
Medical ExpensesOut of Pocket Expenses in Excess of 10% of AGIThru 2019 - Out of Pocket Expenses in Excess of 7.5% of AGI

2020 and After - Out of Pocket Expenses in Excess of 10% of AGI
Estate/Gift/GST TaxFor 2018 - 40% Tax Rate
$5,600,000 per person
For 2018 - 40% Tax Rate
$11,200,000 per person (index for inflation)
*Sunsets at the end of 2025 and reverts to old law.
Also, see below re: index of inflation
Gift Tax Annual Exclusion$14,000 per person$15,000 per person
Same as prior law - indexed for inflation
Corporate Tax RatesTop tax rate - 35%Top tax rate - 21%
Pass-through EntitiesIncome Taxed at Individual RatesGenerally, Income Taxed at Individual Rates with 20% Deduction for Business Profits

Additional General Changes:

Taxation on multinational companies with foreign holdings has been changed from a worldwide tax system with tax deferral of foreign income until repatriation and credit for foreign taxes paid to a territorial system (i.e. tax is paid in the country where the income is derived only) that includes some anti-abuse provisions. There is also a one-time repatriation tax imposed of 8% on assets and 15.5% on cash. There are many changes to the corporate tax regime as well that are too detailed to delve into through this article, but will be subject to future articles.

Outside of tax issues, the Affordable Care Act individual mandate, which required all taxpayers to maintain health insurance or pay a penalty, is eliminated. Also, the law also opens up thousands of acres of the Arctic National Wildlife Refuge (ANWR) to development, mostly for oil and gas production.

Importantly, the law changes the inflation figure that is linked to many of the numbers above (including the estate/gift/GST tax exemption) from the Consumer Price Index (CPI) to the Chained CPI. This will most likely result in smaller increases for inflation each year.

The corporate tax cuts are permanent, but the individual tax issues described above phase out at different time and most sunset after 2025, unless renewed by Congress.

There will be plenty more to come and many future discussions of how this new legislation affects your current situation and future planning, but we hope this article provides a helpful overview of the new law.

Happy New Year from all of us at Rackemann, Sawyer and Brewster.

This material is provided for illustrative purposes only. The material is not intended to constitute investment, financial or tax advice. You should contact your accountant or tax professional for advice regarding your specific situation. Effort has been made to ensure that the material presented is accurate at the time of publication. This information, however, is meant as an overview and not a full and exhaustive review of a complicated law. It should not be relied upon for actions, as it may not be applicable for your specific situation.

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