How will the new tax law, the Tax Cuts and Jobs Act, affect your financial planning?

New tax laws.

New tax laws.

2019 is the first filing season in which most taxpayers will see the effect of the recently passed tax reform, the “Tax Cuts and Jobs Act.” Signed into law by President Donald Trump on Dec. 22, 2017, it was the largest rewrite of the tax code in over three decades. Most of the law’s changes went into effect on January 1st, 2018 and will affect taxpayers returns for the first time this filing season. However, you should note the changes not just for this year’s tax filing, but also in financial planning for your future. Here’s what’s in store:

529 College Savings Plans

If you are currently paying private school tuition, you should discuss the new rules on 529 college savings plans with your financial advisor. 529 college savings plans are tax-advantaged savings accounts for future use on qualified higher-education expenses. Previously, 529 college savings plans were limited in use to “qualified higher education expenses” as defined by section 529 of the United States Code. The new law allows $10,000 per year per student of the tax-advantaged funds to be used for costs associated with K-12 schooling, including public, private, and religious schooling expenses.

ACA Individual Mandate

The individual mandate was a contested provision of the Affordable Care Act that required non-exempt citizens and legal residents of the United States to obtain health insurance or receive a fine in the form of a tax. Beginning on January 1, 2019, citizens and legal residents no longer face a penalty tax if they opt not to purchase health insurance.

Alimony

Individuals entering into any divorce or separation agreements signed or modified on or after January 1, 2019, may not deduct alimony or maintenance payments, and individuals receiving alimony or maintenance payments under such agreements do not claim the payments as income. Divorce is a financial planning minefield. If you currently have the misfortune of embarking on a divorce or separation, meet with your financial advisor to discuss the financial implications of any agreement.

Alternative Minimum Tax

The alternative minimum tax, or AMT, is a separate calculation that must be made by higher-income families, alongside their standard income tax. The taxpayer must pay whichever calculation yields the higher amount. The AMT is meant as an insurance policy against high-income individuals reducing their tax burden too low. The new tax law reduces the number of people subject to the AMT. For married couples filing jointly, the exemption amount rose from $84,500 to 109,400. For single filers, it rose from $54,300 to 70,300. For married couples filing separately, it rose from $42,250 to $70,300. The phase-out thresholds also rise from $160,900 to $1,000,000 for married couples filing jointly and to $500,000 for all other taxpayers.

Bicycle Commuting

In the past, bicycle commuters could exclude up to $20 per month from their gross income, if the payments were categorized by their employer as qualified bicycle commuting reimbursements. The new tax law suspended this provision through 2025.

Child Tax Credit

If you have children, this is a good change for you. The child tax credit doubled from $1,000 per child to $2,000 per child. Up to $1,400 of the credit is refundable. There is also a new $500 nonrefundable credit for non-child dependents. Under the new law, the phase out also more than doubles for all taxpayers. The phase-out is now $400,000 for married couples and $200,000 for all other taxpayers.

Corporate Taxes

The top corporate tax rate was reduced from 35% to 21%. If you are a business owner or in the process of forming a new business, meet with your financial advisor to discuss the benefits and drawbacks of different entity structures. The new tax law alters rules for both corporations and pass-through entities. Choice of entity classification is very important and very complex, and can depend on your overall financial situation and goals. If your business is already classified as a certain entity structure, it still may be in your best interests to change the classification. It is best to consult with an expert before making such a choice.

Estate Taxes

The Tax Cuts and Jobs Act doubles the estate tax exemption from estates up to $5.49 in value to estates up to $11.2 million in value.

Home Sales

Homeowners can exclude the same amount of gains as before ($500,000 if married filing jointly, $250,000 for all other taxpayers), but they must now live in their home as their primary residence for five of the eight years prior to the sale to claim this exemption and can only claim the exemption once in a five-year period.

Medical Expenses

All taxpayers can now deduct out-of-pocket medical expenses in excess of 7.5% of their adjusted gross income. The previous law had a higher threshold for most taxpayers of 10% of their adjusted gross income.

Mortgage Interest Deduction

The new tax law reduces the mortgage interest deduction to interest paid on up to $750,000 of principal value. The previous law had a $1,000,000 cap. The $1,000,000 cap still applies to homeowners who received their mortgage on or before December 15, 2017 and who refinanced their mortgage on or before that date.  

Moving Expenses

Previous law allowed a deduction for moving expenses if the move met several qualifications. The Tax Cuts and Jobs Act removes this deduction through 2025 for all taxpayers except military servicemembers.

Pass-Through Business Entities

If you own a pass-through business such as a sole proprietorship, a partnership, or an S-corporation, you can now deduct up to 20% of your qualified business income from your pass-through business entity. Be careful in your planning though, qualified business income does not include “guaranteed payments” to members. This deduction begins to phase-out for married couples filing jointly at $315,000 and for all n other taxpayers at $157,000. Consult your financial advisor to ensure you take full advantage of this deduction.

The Standard Deduction

Under the Tax Cuts and Jobs Act, the standard deduction almost doubles for every taxpayer. For individuals, the standard deduction rises from $6,350 to $12,000. For heads of household, the standard deduction rises from $9,350 to $18,000. For married couples filing jointly, the standard deduction rises from $12,700 to $24,000. Most taxpayers take the standard deduction instead of itemizing their deductions. Consult your financial advisor to decide which is best for you.

State and Local Tax (SALT) Deduction

The new tax law limits the itemized deduction for amounts paid in state and local property, income, and sales taxes to $10,000 in combined state and local income, sales, and property taxes.

Student Loan Debt Discharge

Under the previous law, student loan debt discharged due to death or disability was taxed as income. The new tax law does not tax such amounts as income.

Tax Brackets

The new tax law reduces the marginal tax rate for most tax brackets and sets a higher income threshold for the lowest tax bracket.

Outlined above are several major changes from the Tax Cuts and Jobs Act, but there may also be minor changes in the law that affect your unique situation. Your financial advisor should be familiar with the law and its nuances. Consult your financial advisor to take full advantage of the new law and plan your financial future in accordance with its provisions.