While the 2017 Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017 is some 500+ pages, we wanted to summarize several of the key changes and how those changes may affect you and your financial planning and wealth management strategies.
While there continue to be seven brackets, most brackets have seen a 2-3% reduction.
| The previous brackets were: | 10% | 15% | 25% | 28% | 33% | 35% | 39.6% |
| The new brackets are: | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
Additionally, the range of income within the brackets has widened. As an example, the previous 25% tax bracket had a high end range of $156,150 of taxable income for married joint filers. The new 22% tax bracket goes up to $165,000 and the 24% tax bracket goes up to $315,000, again for married joint filers. This is certainly a positive as taxable income is being taxed at lower rates.
There has been a significant increase in the standard deduction to $12,000 for single filers (was $6,500) and $24,000 for married joint filers (was $13,000). Many anticipate that this will mean that most filers will shift to using the standard deduction amount versus itemizing deductions as they may have in the past.
The personal exemption of $4,150 for yourself, your spouse and each of your dependents (subject to income phase-out limitations) has been eliminated.
There were several changes made in the area of itemized deductions. Likely the most significant is the new limit of a maximum of $10,000 per year itemized deduction for the combination of state and local income, sales, and property taxes. For those living in high income tax states or those with large houses this likely will affect you. Other changes included the elimination of the deduction for home equity loan interest, a cap on interest deductibility on new mortgages (mortgage limit of $750,000 on combined first and second home) and the elimination of miscellaneous itemized deductions. As mentioned above, these changes combined with the significant increase in the standard deduction are likely to move many more people to utilize the standard deduction versus itemizing deductions. One opportunity to consider here is the potential bundling of allowable deductions in one year to exceed the standard deduction amount; charitable giving and the potential use of a donor advised fund could be an excellent example.
The child tax credit has been increased from $1,000 to $2,000 for children under age 17. Additionally, it will now be available to higher income earners as the income thresholds have been increased for both single and married joint filers.
The estate tax exemption amount has increased from $5.6 million to $11.2 million per person, or $22.4 million for a married couple utilizing the portability provisions. If you were likely subject to an estate tax prior to this change, there are likely planning and simplification opportunities to be considered here.
While the above discussion is all focused on the changes in individual taxes, there was a significant reduction in the corporate tax rate from 35% to 21%. Additionally, a qualified business income deduction was added which will allow some businesses to deduct 20% of their qualified business income. This is certainly good news for corporations and business owners and likely also good news for those that are shareholders of those corporations.
For many, the above changes create opportunities to be considered as part of your comprehensive financial plan and overall wealth management strategy. If you have questions or would like to discuss further, please feel free to contact us at 800-503-9500.
Notes/Disclaimer: To note, many of the provisions of the personal income tax and estate tax changes are scheduled to expire December 31, 2025. The corporate tax reduction is permanent (until changed by law). All discussion related to federal tax impact; have not considered any state or local income tax impact. These are general comments and observations meant to be educational in nature and none of the above is specific advice to any individual. Any specific opportunities should be discussed first with your wealth management or CPA/tax professional.