The New Tax Law Impact for Investors and TaxpayersSubmitted by Bond & Devick Wealth Partners on March 5th, 2018
This is our analysis of the new tax law. Every situation is unique and we encourage you to review these changes with your accountant to see how they might impact your taxes for 2018 and beyond.
Who are the potential winners?
- Taxpayers with children. The child tax credit doubled to $2,000 per child.
- Small pass through companies (S-corps) and sole proprietors could see their taxes decrease by almost 10% (depending on the type of business and the amount of income). Smaller C-corporations should discuss the possibility of converting to an S-corp with their CPA.
- Individuals saving for college. 529 plans become more flexible (can now also be used for primary and secondary education expenses up to $10,000 a year per student). Anyone with a Coverdell Education account might want to consider transferring those assets into a 529 plan. Unrelated to the new Federal tax law, for those of you who live in Minnesota there are now more tax benefits for saving for college in a 529 plan. See our Facebook page or call us for more information.
- Wealthy individuals who leave assets to their children. The estate tax exclusion has doubled to $11,000,000 per person and $22,000,000 per couple. However, the state of Minnesota and several other states, have much lower exclusion amounts than the federal limit (MN is currently at $2,100,000 per person and increasing to $3,000,000 in 2020 and beyond). We help many clients with estate planning strategies to reduce or eliminate estate taxes, especially those who are open to charitable gifting.
- Individuals who did not itemize are going to see a large increase in the standard deduction, which could lead to a lower tax bill.
- The Alternative Minimum Tax (AMT) survived, however the exemption amount and phase-out thresholds were increased so fewer people will find themselves in AMT going forward.
Who are the potential losers?
- Taxpayers who have high state and local income taxes and/or property taxes. The new tax law combines these two deductions into one and limits the deductible amount to a total of $10,000. Single taxpayers with no dependents in this category may see their taxes increase.
- Numerous studies have been done about why people give money to charity. Now that many people will no longer itemize (due to the increase in the standard deduction) some are worried charities may see a reduction in gifts. For those individuals who are over 70½ and no longer itemize, gifting a portion of your Required Minimum Distribution to charity may still be an effective way to give to charity and receive a tax benefit.
- All miscellaneous itemized deductions subject to the 2% AGI rule have ended. This means investment management fees, attorney and accountant fees are no longer tax deductible for those who itemize.
What hasn’t changed?
- The good news for 401k plans is that the tax-deferred benefit is still available. The ability to deduct 401k contributions from your taxes may not be around for long, but it did survive this tax bill.
- Tax on investment income (dividends and capital gains) has not changed.
- Heirs continue to receive a step-up in tax cost basis on non-retirement accounts.
- Municipal bonds remain attractive for many high income tax payers, even with the reduction in the top tax rates.
The new tax law certainly did not simplify the tax code, if anything it is more complex than ever. Our team is here to design strategies to help you minimize your taxes. Please feel welcome to call us if you have any questions on how the new tax law impacts you.