Itemized Deductions: Itemized deductions will have more limitations, which particularly impacts high-income earners (who are more likely to itemize). In fact, with the increased standard deduction and minimization of itemized deductions, it is anticipated that the vast majority of taxpayers will not itemize. The most impactful updates include:
- State Income Tax, Local Income Tax, and Property Tax: Taxpayers will be able to deduct their combined state income tax, local income tax, and property tax, up to a maximum of $10,000. This applies to both individuals and married couples, but is reduced to $5,000 for those married filing separately. This will mostly be a negative to those in California, which has a high state income tax and property tax. We recommend that you consider paying your 2018 property taxes in 2017, as you may not be able to fully deduct those taxes next year. Please consult with your tax advisor.
- Mortgage Deduction: For mortgages taken out after December 15, 2017, the mortgage interest deduction is limited to $750,000. Existing mortgages retain their ability to deduct interest up to $1,000,000. Refinances will also retain a $1,000,000 limit, but only for the remaining debt balance.
- Medical Expenses: Under current tax law, you are allowed to deduct qualified medical expenses in excess of 10% of your AGI. The new law reduces that threshold to 7.5%, both for 2017 and 2018. However, after 2018 it will revert back to the original 10% of AGI threshold.
- “Miscellaneous Itemized Deductions”: Investment advisory fees (such as Opes’ management fee), tax preparation fees, and other “miscellaneous itemized deductions” that were applicable if greater than 2% of AGI, will be completely repealed. If you currently pay Opes’ management fee from your taxable account, but also have an IRA under our stewardship, we may adjust how your billing is processed. We will contact you individually if you meet these criteria.
- 529 Accounts: This savings vehicle has been instrumental in helping parents save and pay for college. Interestingly, the new tax code now also allows up to $10,000 per year, per child, to be withdrawn tax-free for qualified expenses related to a public, private, or religious elementary, middle, or high school. Examples of qualified expenses include tuition, books, and tutoring.
- Estate & Gift Tax: The gift and estate tax exemption was doubled, to $11.2 million for individuals and $22.4 million for couples. Those over the threshold will continue to pay the current 40% tax rate. Overall this will result in fewer Americans paying the estate tax.
Other important features:
- The Individual Mandate, which requires individuals to purchase health insurance or pay a penalty, will no longer apply beginning in 2019.
- Tax Credit for Electric Cars: Those purchasing electric vehicles will remain eligible for a credit of $2,500 – $7,500 (depending on the battery capacity of the vehicle).
- 1031 Exchange: The new law only allows 1031 exchanges for real estate. It is no longer applicable to other types of like-kind assets.
Updates for Corporations
- The corporate tax rate will be lowered from a tiered system with a top rate of 35% to a flat 21%. The AMT for corporations will also be repealed. This is a very pro-business move.
- Repatriation: Cash and cash equivalents held offshore by corporations will be taxed at a 15.5% rate when brought back to America, as compared to a previous top rate of 35%. Income from illiquid assets, such as manufacturing plants, will be taxed at 8%.
- “Pass-through” businesses, such as S corporations, LLCs, partnerships, and sole proprietorships, are eligible to deduct 20% of their income. This will reduce their tax bracket and taxable income.
Opes Advisors is not a tax or accounting firm. Please consult your tax advisor or financial planner for details specific to your situation.