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The Tax Cuts and Jobs Act (TCJA) has created a media frenzy and widespread confusion. With that in mind, I will provide a brief overview of the new provisions, followed by some practical ideas on ways to reduce taxes.

The bill slashes corporate tax rates and cuts individual tax rates – especially for high-income taxpayers. The corporate reductions are permanent while the individual tax cuts expire after 2025. Over the next decade, these provisions are expected to add about $1.5 trillion to the U.S. deficit. What advisors need to know is this: Some people will benefit from TCJA, while others will find their tax liabilities increased.

Below are the individual tax changes at a high level followed by some observations:

  • Highest tax bracket is reduced to 37% versus the prior 39.6%.
    • Remember that material reductions don’t occur until income levels are over $75,000 for singles and $150,000 for married couples.
  • The standard deduction is doubled to $12,000 for singles and $24,000 for married couples.
    • We may see fewer people itemizing deductions.
  • Alternative Minimum Tax (AMT) exemptions are increased.
    • As a result, fewer high income people will be subject to AMT and, if subject to AMT, will pay less.
  • The estate tax exemption is doubled to almost $11 million per person.
    • This means that fewer estates will be subject to estate tax.
  • Personal exemptions are eliminated.
    • This elimination essentially offsets benefits from the standard deduction increase.
  • The mortgage interest deduction for new purchases of main and second homes is now limited to a maximum principal of $750,000and deductions for home-equity interest are eliminated.
    • This could depress residential housing prices for higher price-tag homes and encourage “grandfathered” homeowners to not sell their homes.
  • Miscellaneous itemized deductions, including tax-preparation fees, investment-management fees, employee business expenses and professional dues, have been eliminated.
    • This does not impact those subject to AMT.