Tax Cuts and Jobs Act of 2017 – Article 1: What Are the Changes?

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Tax Cuts and Jobs Act of 2017 – Article 1: What Are the Changes?

President Trump approved the Tax Cuts and Jobs Act of 2017 right before Christmas, and it has now been signed into law.  As a result of multiple versions of the Act being circulated and debated in headline news stories, many investors wonder exactly what the final 1,000-page bill entails, how it affects them personally and what the short and long-term implications are for the economy and investment portfolios. While the motivation of the tax reform movement came from a desire to cut corporate taxes, most of the benefits will help individual taxpayers.

For individuals, in general, there are lower tax brackets and thresholds. The largest percentage decrease is in the highest tax bracket, with the rate decreasing from 39.6% to 37%. The bill virtually eliminates Alternative Minimum Tax (AMT), and limits state and local income tax deductions to $10,000. The standard deduction is doubled, and personal exemption is eliminated. The mortgage interest deduction is eliminated (except for the first $750,000), and current mortgage holders are grandfathered in.

Percentage Decrease in Taxes Per Income Level

Source: Tax Policy Center

The rules for qualified education related expenses for 529 plans are expanding to allow for $10,000 per year to be used for K-12 education. In addition, the child tax credit is doubled. Lastly, the bill repeals the individual Affordable Care Act mandate, not requiring all individuals to be insured. Moving expenses are no longer deductible, other than for those in the military.

Depending on factors such as income, state of residence and home ownership, individuals and families may pay more or less than they currently do. For example, high wage earners in a no-tax state could see savings, while high wage earners in a high tax state like California could see a higher tax bill.

On the corporate side, the tax rate for corporations has decreased to 21% from 35%, and Alternative Minimum Tax (AMT) has been eliminated. There is a reduced rate on pass-through entities, and a one-time repatriation tax for U.S. corporations. In addition, corporations can now expense 100% of their investment spending. Prior to this bill, the U.S. had the highest corporate tax rate in the world; now, it is slightly below average as shown in the chart below.

Corporate Tax Rates Per Country

Source: JP Morgan Asset Management

According to the Joint Committee on Taxation, the fiscal deficit will increase by $1.46 trillion over the next decade. Though this number is significant and these changes can be overwhelming, taxpayers won’t need to worry about these changes when filing 2017 taxes, as they will only be applicable for 2018 taxes. We encourage you to consult a tax advisor to see if there are any strategies you can employ in 2017 and beyond to help minimize taxes.

To read more about estate planning changes, and how this bill affects the economy and investor portfolios, please read our next three articles in the Callan Capital Guide: Economic and Investment Implications of the Tax Cuts and Jobs Act of 2017.  You can also download the entire guide here. If you are a client and would like further detail on these topics or anything else, please don’t hesitate to call or email us. If you are not a client, but would like more information on Callan Capital, please visit www.callancapital.com or call (858) 551-3800.

 

Important Disclaimers: Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.

The tax information provided in this document is for general informational purposes only—it is not meant to be used, and cannot be used, by individuals to avoid federal, state or local tax penalties. Taxation varies depending on an individual’s circumstances, tax status and transaction type; the general information provided in this guide does not cover every situation—for complete information on your personal tax situation, you should always consult with a qualified tax advisor.

By | 2018-01-02T18:46:28+00:00 December 28th, 2017|Financial Planning|

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