It's Official - New Tax Legislation Has Been Approved
Congress has passed the most significant tax reform since 1986 reforms under President Reagan. President Trump is expected to have signed into law by the time this message reaches our clients, and our website. Here are comments on the changes that we believe are most impactful for our clients. Links at bottom. Read more if interested.
Bottom line - this reform is largely focused on corporations. Most of the individual provisions will expire and be re-evaluated by future Congress, 2025 in most cases.
- For clients who own stocks (nearly 100% of our clients) – the corporate tax rate is being reduced from 35% to 21%. This is the only permanent provision of the legislation. Economists and experts are divided about the impact and efficacy about the trickle-down benefits of the corporate tax cut, and impact to our national debt. One thing is for sure, however, the stock market has responded strongly and decisively positive to the news of corporations having lower costs and more flexibility in what they can do with their cash reserves. Well-managed corporations who have a long-term focus and strong strategic plans are quite likely to reinvest cash for future growth, productivity, health of their workforce, and shareholder benefit. Meaning tailwinds, not headwinds, for the value of their stock. Stocks of large US corporations are not necessarily overpriced in the context of this reform. We will comment on market outlook for 2018 in our New Year blog, more to come.
- For clients who file using standard deduction – the amount of your deduction is doubling in 2018, $12,000 for single filer and $24,000 for married filers. Although your marginal tax bracket may only go down by 1%-2%, and although you are losing the benefit of personal exemptions (which may impact families with at least 2 children), it could also be true you get a much larger deduction. We would frame this as a relatively tax neutral combination of changes for you. Barring any unforeseen changes to your income, and barring any impact of AMT (if that applies to you), your tax liability could be about the same when your CPA crunches it all. For retirees using standard deduction who do not benefit from exemptions and child tax credits, your tax bill is likely to decrease.
- For clients who file using itemized deductions – if you are near the margin of the new standard deduction amounts, then 2017 will be the LAST YEAR that you’ll itemize. Starting 2018 you’ll be shifting to the new standard deduction levels of $12,000 (single filer) and $24,000 (for married filers). Medical expenses, mortgage interest, charitable giving, and other expenses you normally itemize will matter to you much more this tax year than in the next 7 years. If your itemized deductions tend to run significantly higher than the new standard level, you may continue to itemize and you are less impacted by this change.
- For clients who are charitably inclined – consider either pulling in/advancing donations before year-end this 12/31/17, or consider bunching contributions every 2-3 years, if possible. The goal here being to take advantage of itemized deductions that would surpass the new standard deduction level. This strategy may end up being most effective for our clients who are not in the highest tax brackets, nor impacted by AMT…clients falling in the 30% or lower brackets. Because stocks have run up so much this year, it may also make more sense for you to consider donating stock shares rather than cash (receiving both the deduction and also the potential sheltering capital gains)
- For clients living in high-tax states (CA, NY, etc) – your state tax deduction has been capped at $10k starting 2018, and as a result you also may go to the standard deduction system unless you have multiple expenses to itemize. This certainly can create a tax increase, particularly for our higher-earners with larger income and property tax bills. Your CPA can help you figure out if the reduction in your marginal income tax bracket is enough to offset the impact of this change.
- For families who believe they may have to pay federal estate tax upon death – The thresholds will effectively double in 2018. “Death tax” did not get eliminated. Believe it or not, very few of our clients (count on one hand) would have been estate tax payers prior to this tax reform change. The meaningful reform for estate tax occurred years ago when the thresholds were increased significantly ($10 million for a married couple). Meaning, estate would have to be worth more amount when the SECOND spouse passed. With health costs and end-of-life costs what they are, and with proper charitable gift planning, it has been (and will continue to be) very difficult to pass away with a death tax impact at the federal level. The estate tax in recent years (and going forward) is much more of an issue at the state level. Not particularly relevant in FL, but somewhat relevant for clients in other states.
Please note common misconceptions that did NOT play out in the final bill:
- Did NOT do away with the mortgage interest deduction. It remains. Less people will itemize, and more will use the new standard deduction.
- Did NOT do away with charitable giving deductions, or medical expense deductions.
- Did NOT impact 401k/retirement contributions or reduce the current level of maximum contributions.
- Did NOT penalize teachers and educators with the type of deductions they can take for classroom expense. Teachers may benefit from the increase in the standard deduction and therefore may have simpler (and cheaper) tax returns.
- Did NOT do away with AMT tax. It remains. Income thresholds have changed somewhat from AMT perspective (but not significantly).
- Did NOT reduce marginal bracket only for the highest earners. Every marginal bracket from 15% - 40% was reduced. The main impacts of this reform are not in the marginal tax bracket changes. The devil is in the details (so to speak).
This reform requires each individual family, along with their CPA and our team, to figure out how their personal tax liability will be impacted once combining the impact of standard deduction changes, exemptions going away, child tax credits staying, AMT change, etc. For the majority of our clients, this will be a tax neutral change or a slightly positive change. We believe corporations are the real winners in this reform.
Links to watch/ read more:
Raymond James Chief Economist Scott Brown talks about the tax reform - http://www.raymondjames.com/pointofview/its-official-new-tax-legislation-approved-video
CNN Money article, relatively easy read, 34 things you need to know about the incoming tax law - http://money.cnn.com/2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html
Motley Fool article, comparisons of 2017 and 2018 individual tax brackets in tabular format - https://www.fool.com/taxes/2017/12/19/heres-what-the-2018-tax-brackets-will-be-if-the-go.aspx
Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJA, we are not qualified to render advice on tax matters. Raymond James does not provide tax services. Please consult your tax advisor for your particular situation.
Opinions expressed are not necessarily those of Raymond James. This information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
