Tax Reform. What does it mean for you?

As the dust settles on the new tax reform bill, a short summary is itemized below:

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Most provisions are set to take effect in 2018, but many of those are also set to expire or sunset in 2025.


1. Reductions in individual tax rates. The bill retains the current structure of seven investor tax brackets, but lowers five of them. It also includes the sunset provision, meaning it's a temporary arrangement from 2018 to 2025. If the bracket changes affect them, investors might want to consult tax experts before making adjustments to long-term plans. 

Standard Deductions increasing nearly 90%. For married couples filing jointly, the standard deduction rises to $24,000 from $12,700; for single filers, it moves to $12,000 from $6,350. 

2. Additional changes to Itemized Deductions. These vary, and some might be more impactful than others to individual investors.
Personal exemption ending, but child tax credit increasing. The bill ends the personal exemption of $4,050 for you, your spouse, and your dependents; it doubles the child tax credit to $2,000 per dependent child under age 17.
Limits to state and local taxes ("SALT"). Under the bill, you may only deduct up to $10,000 in state and local taxes, including sales, income, and property taxes. This deduction was not previously subject to limitation.
Caps on mortgage interest. The bill allows mortgage interest deductions for current homeowners, but caps the interest deduction at $750,000 in mortgage debt for homes bought in 2018 and beyond, down from the $1 million limit in place now. It eliminates deductions for interest on home-equity loans, as well as deductions for moving expenses and employer-provided expense reimbursements (except for members of the military).
Expands medical deductions. Current law allows for deduction of medical expenses over 10% of adjusted gross income (AGI). The bill lowers the threshold to 7.5%

3. Changes to estate planning. As noted above, the bill doubles the estate tax exemption to $10 million, but it's also indexed for inflation after 2011. The bill also calls for doubling the value threshold on the 40% levy on estates worth nearly $11 million for individuals and $22 million for couples. The estate tax exemption also has the sunset provision, meaning that the bill calls for a reversion back to current exemption amounts in 2026. 

4. Charitable deduction decisions may change. Although the current tax deductions stay in place, the doubling of the standard deduction to $24,000 essentially raises the threshold on deductibility. Taxpayers will have to itemize donations to get the benefit. 

5. Roth recharacterizations. Under current law, if you convert a traditional Individual Retirement Account (IRA) to a Roth IRA, you can later choose to do a recharacterization back to a traditional IRA. The bill takes away the recharacterization provision that allows taxpayers to unwind a conversion. 

7. No switch to FIFO in the selling of securities. The FIFO (First In First Out) provision that was part of the original Senate bill has since been removed.

Black Oak Wealth Management does not provide tax advice. Please consult with a qualified tax-planning professional regarding your personal circumstance.

Phillip Hanks