Wait, what just happened?
Many of you surely said this as 2017 came to a close. There was much talk about tax reform toward the year’s end. The nuts and bolts of the bill changed as frequently as some people change their clothes, making it hard to keep track of what was in and what was ou But now that the bill has passed and the dust has settled, we have can digest is in the bill. Here is an overview of the changes, with some things to consider and potential steps to take if they make sense for your situation:
When will it take effect?: The provisions of the bill are effective from Jan. 1, 2018 through Dec. 31, 2025, with some exceptions and phase outs. After Dec. 31, 2025, the law sunsets to that which existed as of Dec. 31, 2017. This is not unprecedented; Bush the First used a similar mechanism to gradually increase the federal estate tax exemption before it sunset in 2010.
How Does the tax rate change?: The maximum tax rate will drop from 39.6 percent to 37 percent. There are still seven tax rates — 10 percent (for $0 to $9,525, and $19,000 for married couples), 12, 22, 24, 32, 35, and 37 percent (more than $500,000, and $600,000 if married). The Internal Revenue Service will publish the official table at the end of January 2018.
What happened to the Alternative Minimum Tax?: The Alternative Minimum Tax is still around, but the threshold of when it kicks in was increased to $1 million (married) and $500,000 (single). In other words, under the Alternative Minimum Tax, a taxpayer begins to lose the potency of certain deductions like real property taxes and mortgage interest at a certain income level. The thresholds under the old law were $164,000 (married) and $123,000 (single). Under the new law, higher income earners can continue to benefit from deductions.
Can I take an itemized deduction?: For taxpayers who did not want to itemize deductions or did not have them available to deduct (such as real property tax and mortgage interest, or charitable deductions), the government allows a “standard” deduction amount. The bill nearly doubles the standard deduction from $13,000 to $24,000 (married) and from $6,500 to $12,000 (single).
Can I take medical expense deductions?: If you think that you will have increased medical expenses, 2017 and 2018 would be the years in which to aggregate them, if you have that option available. Under the prior law, medical expenses needed to exceed 10 percent of adjusted gross income. The bill reduces that threshold to 7.5 percent for the 2017 and 2018 tax years.
Is there an estate tax?: The bill changed the federal estate tax from about $5.6 million per person to $11.2 million per person until 2025, at which point the provisions sunset and the federal estate tax exemption reverts to where it was as of Dec. 31, 2017, with adjustments for inflation. However, the bill impacted only federal estate tax. Most states also impose an estate tax, which remains unchanged absent state-law changes.
What about state and local tax deductions?: State and local tax deductions such as real property taxes, state income taxes, and municipal income taxes are capped at $10,000. However, if you were subject to the Alternative Minimum Tax previously, it is likely that you were phased out of the impact of these deductions anyway.
And what about the kids? What provisions impact them? This being a parenting magazine, here are some of the ways he bill changes your taxes as it relates to your children:
The “kiddie tax”: The “kiddie tax” is the rate at which unearned income of children under the age of 19 (and college students under 24) is taxed. So, in other words, if you gifted stock to your kids when they were born, and it throws off $10,000 in income per year in dividends, the income is “unearned,” unlike wages and salary.
Child tax credit: The tax law allows for a tax credit (an amount to offset the tax you would otherwise owe, as opposed to a deduction, which offsets the overall gross taxable income) for the number of children you have. As with the Alternative Minimum Tax, under the prior law, the potency of the child tax credit was phased out above a certain income threshold. The bill increased the child tax credit to $2,000 per qualifying child and is refundable up to $1,400 subject to phase outs (meaning that even if you do not owe any taxes, the government will refund you the money from the credit).
Deduction for Student Loan Interest: The maximum amount that can be deducted for interest on student loans is $2,500, with phaseouts for taxpayers with modified adjusted gross income exceeding $65,000 ($135,000 for married filers).
529 Accounts: You may now access 529 funds to pay for educational expenses for kindergarten through grade 12 schools, not just college.
These are just some of the aspects of the elements of the new law. How the bill will impact you and your family depends on your situation. You should consult your accountant to determine how the bill affects your tax situation and determine what, if any, changes to make in your tax planning in 2018.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C. Find her on Twitter @estatetrustplan and on her website at www.besun