Implications of 2018 Tax Reform
Understanding the implications of one of the most significant tax reforms in recent history is important. Take steps to evaluate the implications and new opportunities.
Potential Direct Financial Impact
- Higher take home pay due to lower tax brackets and less withholding from your paycheck (unless you updated your W-4).
- Differences in your total tax bill when filing 2018 taxes with the IRS due to nearly doubled standard deduction, no personal exemptions, and/or new limits placed on deductions like state and property taxes, interest paid on mortgages and HELOCs, etc.
- Potential decrease in the tax benefits realized from homeownership for those with high property taxes due to new limits on state, local and property tax deductions up to a combined total of $10,000.
- Significant tax savings for corporations with the permanent tax rate cut to 21% and the elimination of corporate Alternate Minimum Tax (AMT).
- Potential pass through business deduction up to 20 percent of your qualified business income for pass through business owners (LLC, S-corp, sole proprietor)
- Potential gift and estate tax savings as a result of the recently doubled Federal Estate Tax and Lifetime Gifting Exemptions.
- Decrease in tax deductions for those that previously could deduct alimony payments.
- Interest paid on a HELOC is no longer tax deductible unless it is used to finance home improvements.
- Potential tax savings from deductions on any medical expenses that exceed 7.5% of your AGI.
- Potential tax savings related to the recently increased qualified cash charitable deductions.
- Potential increase in the amount of tax-free gifting that you can take advantage of each year with the increase in the annual gift exclusion to $15,000 per person.
- Potential tax free growth on funds saved to cover private education costs with use of the 529 plan now eligible for K-12.
- Potential tax savings from the new tax credit for adult dependents and/or doubled child tax credit with higher income limit.
Potential Secondary Impacts
- The need to revisit and potentially update your W-4 withholdings, so that you do not get caught off guard when you file your 2018 taxes.
- The need to evaluate whether it is more advantageous to itemize or take the nearly doubled standard deduction, or switch off and pay 2 years worth of property taxes in one year depending on the amount relative to the $10,000 limit.
- The need to consider how the lowered mortgage interest deductions (now including a HELOC) may impact any goals to buy a new home.
- The need to consider how the expanded use of 529 plans may help save for private school costs for grades K-12.
- For business owners, may need to revisit the importance of entertaining clients since those costs will no longer be deductible.
- For business owners, may need to revisit sources of funding now that you can only deduct interest paid on business loans that equal 30% of adjusted taxable income.
- For business owners, can only carry forward net operating losses up to 80% in any given year.
Self Completion/Execution Risks
- Not updating your W-4 to account for tax changes and getting hit with an unexpected tax bill when you file your 2018 taxes.
- Not realizing that you can only deduct interest on a HELOC now if it is for home improvements (as opposed to using it to pay off other debt or fund college etc.) and it is now lumped into the mortgage interest limits.
- Not realizing that you are now only able to deduct a total of $10,000 for state income taxes, local taxes, and/or property taxes combined.
- Not realizing that you can no longer deduct alimony payments.
- Potential missed opportunity for growth on dollars that could have otherwise been saved or invested as part of a college 529 plan now available for funding private school for grades K-12.
- For business owners: Not realizing you can no longer deduct client entertainment expenses.
- For business owners: Not realizing you can only deduct interest on business loans equal to 30% of your adjusted taxable income.
- For business owners: Not realizing you can no longer use net operating losses to adjust prior tax returns and losses are limited to 80% in a given year. The rest must be carried forward.
Situations Where Expertise Adds the Most Value
- Tax Adviser
Working with a tax advisor can help ensure that you are well prepared to handle the tax code changes, so you don’t get hit unexpectedly with a tax bill when you file your 2018 taxes. Additionally, a tax advisor may be able to work with you to determine if it would be more advantageous to take the standard or itemized deduction based on the changes, or switch off from one year to the next to maximize certain deductions. If you are a business owner, independent contractor, and/or you split your time between multiple states, it may be especially worthwhile to consult a tax advisor.
- Legal Adviser
Due to the significant increases to the federal estate tax and lifetime gift tax exemptions, it is highly recommended that you revisit any existing estate plans to determine if they need to be adjusted. As part of this process, keep in mind that the doubled estate tax exemptions are scheduled to sunset after 2025.
- Financial Adviser
With any major changes to your life and/or to your income and overall tax situation, it is important to reassess your cash flow, financial goals, estate planning needs and insurance coverage. The best way to identify any gaps in your plan and cover your bases is to work with a financial adviser who can look at all of the pieces of your financial picture holistically.
- Tax Adviser