They say real tax reform only comes around once a generation. The last time around, during Reagan’s first term, my oldest child was not yet two, but now is the mother of my two grandsons, so I guess the saying is right. Now, like then, tax reform is complex, despite the politicians’ sales pitches of simplification. Not only will strategy and preparation get hard and more confusing for many people, some will pay more, not less, as with any change, some win, and some lose. And that’s before the inevitable unintended consequences come home to whack the unfortunate, a pitfall that would be clear for some time. As the old Chinese proverb goes, “change” can be translated as either “danger” or “opportunity,” and that adage should be remembered as taxpayers begin to sort through their options and plan their 2018 strategies. While our macro view is that this tax reform will truly juice both the US economy and stock market for years to come, the impact on individuals and non-public companies is much more muddled. While we’ll be taking about this for months to come, here’s a digest of the most important aspects for most taxpayers:
1. The estate tax has not been repealed, but the tax free exemption amount has been doubled – to about $22M for couples – but only until 2025 when the exemption will drop back to existing levels. And a a long enough life expectancy to meaningfully grow their estates – and this includes a lot more folks than you might think – should still keep their estate tax guard up and continue to take advantage of the many opportunities to control assets potentially exposed to estate tax. It is very possible – and Camarda thinks highly likely – that estate taxes will apply to much smaller estates later in the century as Federal deficits mushroom, ensnaring many. It was not so long ago that the individual estate tax exemption was $600,000…and it could go there again.
2. Mortgage interest deductibility is now limited to loans of $750K, down from $1M. Loans prior to December 15th, 2017 are grandfathered. Home equity lines are not grandfathered, and are no longer deductible.
3. Itemized deductions are now even more limited. Home real estate taxes, together with any state and local income taxes, are now collectively capped at $10,000. This is a big tax increase for many.
4. Personal exemptions have been eliminated. While the standard deduction has been increased to slightly offset this, it is of no help to those who itemize.
5. The AMT nightmare has been lifted for many, and only those at the highest income levels ($1M or so) will have to go through the bother of calculating tax under two different systems, and paying the higher amount.
6. Say goodbye to bracket creep. Due to a change in how inflation will affect tax brackets, taxpayers will tend to stay in higher brackets since inflation will not effectively lower their taxable income as rapidly. This means more tax.
7. S-corp/S-LLC owners will see some relief, though not nearly as much as initially hyped. Instead of a lower tax rate, they will instead get a deduction for 20% of qualifying income, but still face the highest 37% rate. S-entities also won’t get some breaks applicable to C-entities. Coupled with the new 21% maximum rate on C-entities, small business owners will be faced with a new and complicated dilemma, one unheard of for decades: will a strategy to cobble a switch to C-status result in less tax?
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