I hope you had a great weekend! Happy holidays to all!
LRPC’s Monday Morning Minute for this week, “New Tax Plan: Here’s What You Should Know” (presented below) comes to you courtesy of Charles Schwab & Co. As an independent, objective Registered Investment Advisory (RIA) firm, Lawton Retirement Plan Consultants, LLC (LRPC) has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.
Tax reform has happened! Before the end of last week, President Trump signed the new tax plan into law. Check out the analysis below from Schwab to see how you might be impacted.
Have a wonderful week!
New Tax Plan: Here’s What You Should Know
By Hayden Adams, Charles Schwab & Co.
The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party, nor should the analysis be considered tax advice.
Congress has just passed the most sweeping tax code overhaul in decades. Signed into law this past Friday by President Trump, the majority of its provisions will kick in on January 1, 2018, with many of the changes expiring after 2025. The tax bill will have almost no effect on your 2017 tax return.
Let’s take a look at some of the more important provisions within the bill, and the likely effect on your taxes:
1. Tax brackets will change
The final tax bill keeps seven tax brackets but changes the tax rates, which shifts income into lower brackets. The long-term capital gains tax rates remain essentially unchanged, and short-term capital gains will be taxed at the adjusted ordinary income tax rates.
Most (although not all) taxpayers would owe less under the new rules, according to analyses by various independent think tanks, including the Tax Foundation and the Tax Policy Center. The impact of the changes would vary based on each taxpayer’s income level, amount of itemized deductions and other factors.
2. The standard deduction will increase
The final tax bill nearly doubles the standard deduction, to $12,000 from $6,350 for single filers, and to $24,000 from $12,700 for married filers. About 70% of taxpayers claim the standard deduction, so most taxpayers claiming this deduction likely will benefit from this proposal.
If you’re a low- or middle-income household, an increased standard deduction combined with an increased child tax credit should lower your tax bill.
3. Some itemized deductions are being reduced or eliminated
The final tax bill reduces or eliminates many itemized deductions in favor of a higher standard deduction. The itemized deductions that will be reduced or eliminated include:
- State, local, and property taxes will be limited to a $10,000 deduction.
- Mortgage interest deduction will be limited to $750,000 of indebtedness.
- Miscellaneous itemized deductions will be eliminated.
Here are the itemized deductions that will remain:
Medical expenses: The final tax bill preserves the deduction for medical expenses and temporarily reduces the limitation from 10% to 7.5% of adjusted gross income for tax years 2017 and 2018. Beginning in 2019, only medical expenses that exceed 10% of adjusted gross income are deductible.
Charitable donations: The final bill preserves all the major charitable donation deductions, with the exception of few specific deductions (such as the deduction for payments made in exchange for college athletic event seats).
All else being equal, if you’re in a high-income household in a high-tax state, with a mortgage and high property taxes, these changes could end up increasing your tax liability. However, if you don’t normally itemize your deductions these changes won’t be an issue, and the increased standard deduction should end up benefiting you.
4. The child tax credit will increase
The final tax bill increased the child tax credit to $2,000 from $1,000, and the income level of households eligible for the credit. The tax credit is fully refundable up to $1,400 and begins to phase out for married/joint filers at an income of $400,000 and for single filers at $200,000.
Tax credits are generally better than tax deductions, because credits reduce your taxes dollar-for-dollar, while deductions only lower your taxable income. This change would benefit low- and middle-income households with children.
5. The personal exemption and dependent deduction will be eliminated
The final tax bill eliminates the $4,050 personal exemption and dependent deduction. When combined with the increased standard deduction and increased child tax credit, lower- and middle-income households should see a net benefit despite the elimination of these deductions.
However, higher-income taxpayers could see an increased tax bill from this proposal if they have large families and don’t qualify for the child tax credit, because of the income phase-outs within the tax bill.
6. The alternative minimum tax (AMT) will be changed but not eliminated
The final tax bill increases both the exemption amount and the exemption amount phase-out thresholds for the individual AMT. Beginning in 2018 and ending in 2025, the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers. The phase-out thresholds are increased to $1 million for married taxpayers filing a joint return, and $500,000 for all other taxpayers.
These changes should benefit many middle- and high-income households that were previously affected by this tax.
7. Treatment and calculation of cost basis on investment sales remains unchanged
The Senate tax bill had a provision in it that would have required investors to use the “first-in, first-out” (FIFO) method to calculate cost basis for investment sales. Investors can breathe a sigh of relief, as this provision is not included in the final tax bill.
8. Changes to the taxation of income from pass-through entities
This is a complex area of tax law, and the tax bill includes numerous changes to the taxation of income from pass-through entities such as S corporations, limited-liability corporations, and partnerships. In general, the tax bill allows businesses to exclude 20% of their net income from taxation with certain limitations. The deduction would be disallowed for specified service trades — such as lawyers, doctors, and accountants — or businesses with income above a threshold.
Overall the changes to the taxation of pass-through entities will be beneficial to many business owners, but a lot of service businesses won’t get to enjoy all the benefits of these changes.
9. The corporate tax rate will decline
The final tax bill reduces the corporate tax rate to 21% from 35%. Lowering the corporate tax rate will increase the profits of many companies, which could provide additional capital for business expansion, increase dividends to shareholders and make the U.S. a more attractive place for foreign businesses to open operations.
10. There will be no changes to tax-deferred retirement accounts
Early on in the tax debate, it was rumored that Republicans considered changes to the deductions taxpayers receive for contributing to tax-deferred retirement accounts, such as IRAs or 401(k) retirement plans. The proposal was not included in the final tax bill.
We believe investors should not overreact to the proposed changes in tax law, especially if they have a long-term investment strategy and financial plan.
It’s important to remember that the impact of any of these changes on your personal tax liability would depend on your specific circumstances. In addition, the individual components of your tax bill, including earned income, credits, deductions and other factors work together, like interacting cogs. Therefore, each factor should not be assessed solely in isolation.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.
Additional Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Investing involves risks, including loss of principal. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.