Tax Reform Highlights

The most significant change to the US tax code in 30 years (since 1986) was approved by Congress and signed by the President just in time for Christmas…

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SO, WHAT DOES IT CHANGE?

Corporate (permanent) and Pass Through Entity (temporary) Income Tax:

Corporate Tax Rates are reduced from 35% to 21%.

Business Income from Pass Through Entities: provides for a 20% deduction for individuals and trust and estates on domestic qualified business income from pass-through entities.

  • Effectively reduces the top tax rate for those eligible to 29.6% (f
  • Wages paid to owners and certain income from specified service businesses (i.e. attorney and accounting firms) are excluded from the deduction.

Individual Income Tax: Temporary (most)

Individual Tax Top Rate is reduced from 39.6% to 37%.

Other Individual Tax Rates are changed as follows:*

Standard Deduction for Single Individuals is increased from $6,500 to $12,000.

Standard Deduction for Married Couples is increased from $13,000 to $24,000.

Personal Exemption is reduced from $4,050 to $0.

For Those Who Itemize:

State and Local Tax Deduction and Real Property Taxes – capped at $10,000.

Cap on Deduction for Mortgage Interest decreases from $1,000,000 to $750,000 (mortgages prior to 2018 are grandfathered under the $1,000,000 limit).

Home Equity Line (HELOC) – interest no longer deductible, whether new or existing loans.

Charitable Contribution Deduction – AGI limit for cash contributions is increased from 50% to 60%.

Alimony – not deductible to the payor and not taxable to the payee after 2019.  Applies to divorce or separation agreements executed (or modified) after December 31, 2018.

All other deductions are disallowed, e.g., unreimbursed employee expenses, investment advisory fees, tax preparation fees, etc.

Individual Mandate for Health Insurance: Eliminates the coverage/penalty requirements as of 2019.

Transfer Tax:

Gift/Estate/GST Tax Exemptions: doubles the basic exclusion amount from $5 to $10 million.

  • For 2018, the inflation adjusted amount will equal around $11.2 million (or $22.4 million per married couple.
  • On January 1, 2026, the basic exclusion amount will return to $5 million, as indexed for inflation from 2010 to 2026.
  • “Clawback” unlikely.

What doesn’t it change?

Individual Income Tax:

Long Term Capital Gains and Qualified Dividends is retained at 0%, 15% and 20% (top rate).

Net Investment Income Tax is retained at 3.8%.

Gain on Sale of Principal Residence – Exclusion still allowed for gain up to $250,000 (single) and $500,000 (joint) on sale of principal residence.

Transfer Tax:

Transfer Tax rate (Gift, Estate and GST) is retained at 40%

Step Up in Basis remains unchanged.  Meaning estate assets will continue to receive an income tax basis step up (or down) to the asset’s fair market value at a decedent’s death.

Almost all of these changes will sunset in 2026.  The corporate changes are permanent.

(*chart credits to MBAF)
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