The new tax laws can be complex, so we’d like to discuss a few of the changes, as well as the impact on your finances.
We are certainly not tax experts, but because your tax bill can impact your finances, and hence your available mortgages, it’s worth discussing!
Tax Changes and Your Finances
Note: This article is for general information only. Always consult with a qualified tax professional before making any financial decisions.
Rates and Brackets for Individual, Trusts, and Estates
There has been a significant amount of talk on the changes to tax brackets. Essentially, there are the same number of brackets but they now have lower rates and different thresholds. Tax brackets for trusts and estates have also changed, and there are only four brackets instead of five.
These changes mean the income threshold for the capital gains brackets are no longer connected to the regular income brackets, and the top rate of 37% for trusts and estates begins at $500,000 for single filers and $600,000 for people filing jointly.
Taxable income is calculated after applying any available deductions. This means it will be essential to evaluate how the loss of certain deductions (which have been reduced) will counteract any benefit derived from the lower taxes.
Changes to Deductions, Exemptions, and Child-Tax Credits
Deductions for child tax credits are almost doubled, with $24,000 for married filers and $12,000 for people filing as a single. The deduction for people who are over 65 or blind is also retained, but personal and dependent deductions have been eliminated. There are also new restrictions on state and local tax deductions, limits on mortgage interest deductions, and an elimination of deductions from the interest on home equity loans.
Anyone who does not itemize their deductions will see a benefit, but the repeal of numerous itemized deductions could limit the total amount that many tax payers can deduct. For people in high-tax areas, the limit on SALT deductions could offset the benefits of overall tax reductions.
IRA Contributions and Conversions
There has been a rule that allows one type of IRA to be “recharacterized,” which is basically the conversion of an IRA to get a better tax benefit. This rule is now modified to exclude Roth IRA conversions. However, normal contributions may be recharacterized as you need.
Taxpayers who now want to convert their traditional IRA into a Roth IRA will need to weigh the results before making a decision, as they will no longer have the option of changing once the choice is made. A Roth conversion, however, can still be a useful strategy if there is low taxable income or a market decline in certain assets.
Benefits for Education Tax
If you use a 529 plan, you can now include up to $10,000 annually for elementary and secondary tuition, and this can include both private and religious schools. Also, ABLE accounts, which are tax savings accounts, may accept tax-free rollovers from 529 plans.
The result of this change is that 529 college savings plans and ABLE accounts are a stronger tool for meeting your savings plan. You should consider additional funding for a 529 plan, especially since the funds may now be used for school years ranging from kindergarten through 12th grade.
Taxation of a Child’s Investment Income
If you have investment income of a child, it will be taxed at the rate of a trust rather than an individual. Children who are under the age of 24 and are full time students will no longer be taxed at their parent’s rate but at a trust rate, and the top trust income is the same as the rate for an individual. The top trust rate, however, applies to a lower level of likely income, which could result in a higher tax bill.
To get the best results, review gifting strategies for younger family members. Remember that if the money is for education, the tax rules of a 529 are a better plan. If it’s not for education, investment choices will need to be considered with a tax professional.
Estate and Gift Taxes
Among many other details, the new law doubles the “application exclusion” to over $11,000,000 per person, and this exclusion will continue and will be adjusted to match inflation. The portability section remains unchanged, as are the the rules that provide a step-up in cost basis for capital assets at death.
If you have an estate plan that was created before 2013, you should review the details immediately. Even recent plans may need to be modified for the best benefits, with particular attention paid to the “formula clauses.” Higher exclusions could make overlooking estate tax planning more common, but this will result in missed opportunities. Besides, there are many reasons beyond taxes to examine wealth transfer options. Remember that this is not a permanent cut, so if you don’t plan properly and thoroughly you may miss opportunities if the code reverts back in 2025.
Deductions from Business Income
The tax rate for a C corporation has now been reduced from 35% to a flat rate of 21%, and the corporate ATM is eliminated. There is now a deduction of 20% for the qualified business income of S corporations, partnerships, and sole proprietorships. This will impact the selection of a business entity; the type of business you own may also need to be reconsidered under these circumstances. However, if you have considered investing in capital expenditures, it could be a good time.
Questions still remain about the impact of this change, but the type of business activity will have an impact on the how a taxpayer can benefit from new pass-through deductions. When considering a change of business structure or type, be sure to evaluate the expiration of these new rules.
State and Local Taxes
Some states have tax codes that are tied to federal codes. Each state will now have to decide whether it will stick with the federal changes or craft their own rules. Differences in state and local taxes lead to complexities with deductions, so be prepared for this new change.
If you have tax strategies, take these tax changes into account with the impact on state taxes. When determining you total tax bill (including state and federal taxes) be sure to determine estimated tax payments for 2018.
Get the Right Mortgage for Your Needs
While we can’t help with your taxes, we are experts in helping you get approved for an affordable mortgage. Let our team find the right loan for your specific needs!
