Five Tips for Clients on the New Tax Law
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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 $750,000 – and 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.