The Final Tax Bill – Special Report

On December 22, 2017, President Trump signed into law the tax legislation known as the “Tax Bill.”  The majority of the tax law’s provisions go into effect in January with just a handful delayed until 2019 or after. The signature provision of the law – and where the biggest tax cut was dealt – fell to corporations, where the tax rate was cut from 35% to 21%. A cut this sizable could have a direct impact on corporate earnings, which could flow-through to stock prices in the near to medium term.

Implications of the Final Tax Bill For Individuals

Let’s start with the basic income tax brackets. Please see the table below to see where you’ll fall within the revised brackets.

New Tax Brackets Under Tax Bill

The standard deduction for individuals was raised to $12,000 for single filers, $24,000 for married couples filing jointly, and $18,000 for heads of household. Many deductions were cut or eliminated as a part of the deal – all miscellaneous itemized deductions subject to a 2% floor are suspended through December 31, 2025.

Here are a few key changes for taxpayers to know:

•  The child tax credit was doubled from $1,000 to $2,000 per qualifying child. The phase-out amounts are $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. Tax payers may also claim a $500 temporary credit for non-child dependents.
• There will be a $10,000 cap on state and local income tax and property tax deductions through December 31, 2025.
• The use of 529 plan funds has been expanded to include tuition expenses for private or religious elementary or secondary school up to $10,000 per beneficiary.
• For 2017 and 2018, medical expense deductions will be allowed for amounts in excess of 7.5% of AGI, rather than 10% of AGI.
• For new home purchases made after December 15, 2017 the threshold for mortgage interest deduction has been lowered from $1 million to $750,000. 
• The marriage penalty was eliminated for all couples that earn less than $600,000.

• The present-law maximum rates on net capital gains and qualified dividends are retained.

•  The healthcare mandate under the Affordable Care Act has been eliminated.

• Casualty losses are now limited to federal disaster relief.
• Itemized deductions for investment fees and expenses have been repealed.
• The tax preparation deduction has been eliminated.
• The estate and gift tax exemption has doubled to $11.2 million for individuals in 2018. The exemption for married individuals is $22.4 million in 2018. This provision is effective for deaths and gifts made after December 31, 2017 and before January 1, 2026. The generation-skipping taxes and the step-up in basis to beneficiaries are retained.

It is important to note that with regard to the pre-payment of property taxes, the IRS released an Advisory on December 28, 2017 clarifying:

“The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.  A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.  State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.”

Implications of the Final Tax Bill for Small Businesses

With respect to the taxation of pass through income to partnerships, sole proprietors, and S corporations, most owners will get a 20% deduction for qualified business income. For pass-through corporations that have income of less than $157,500 for a single filer and $315,000 in the case of a joint return, there are no exclusions based on type of business/profession. However, once the income goes above those levels, there are stipulations for pass-throughs whose services include “health, law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners, or which involves the performance of services that consist of investing, investment management or trading or dealing in securities, partnership interests, and commodities”. 

Call WrapManager to Discuss the Tax Bill and What it Could Mean for Your Investment Portfolio  

There are numerous considerations to take into account in the new year, from how you take income to how you invest. If you have questions or just want to use WrapManager as a sounding board for your questions, please just reach out to us at 1-800-541-7774 or send an email to wealth@wrapmanager.com.

The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.

This information is being provided for convenience purposes representing a summary of available information and is not intended to be all-encompassing. Although the information included has been obtained from sources WrapManager believes to be reliable, we do not guarantee its accuracy and information may be subject to change without notice. This should not be regarded as a complete analysis of the subjects discussed, nor should it be relied upon as a substitute for legal, tax or accounting advice by a professional.