I frequently overhear interesting conversations in public places. As an independent financial advisor, my ears perk up whenever the topic turns to finance – investment, savings, retirement plans, taxes, etc. I was recently seated near a group enjoying the happy hour as they launched into the new tax law, and I heard confusion. It seems that the recently enacted federal tax code may turn accountants into superheroes. Here’s an update from my online library:
The enactment of the Tax Cuts and Jobs Act represents “the most sweeping overhaul of the U.S. tax code in more than 30 years.”1 For millions of Americans and businesses, it means an altered financial and investment landscape with new opportunities and challenges in the years ahead. Keep in mind, however, that the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.
Business Takes Center Stage
Businesses may begin benefiting from a number of changes, including
- Reduction in the top tax bracket from 35 percent to 21 percent;
- Full and immediate expensing of capital investments (phased out after five years);
- Implementation of a territorial tax system that taxes only income earned within the U.S.;
- Special one-time tax on repatriation of foreign earnings;
- Repeal of corporate AMT; and
- A 20 percent deduction of qualified business income from certain pass-through entities. Service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers.
Business owners should consider meeting with a tax professional to understand the impact of these changes on employee benefits, business investment, and corporate structure. The changes in tax law may affect companies differently, which could shift where future investment opportunities may be found. Keep in mind the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.
Overall, the tax cut is projected to increase corporate profits, with many Wall Street analysts lifting their 2018 earnings forecasts anywhere from seven to 10 percent.2 This may not only justify current stock valuations but may influence prices going forward. Past performance does not guarantee future results. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
Changes for Individuals
The Tax Policy Center projects that taxes will fall for all income groups and result in an increase of 2.2 percent in after-tax income. The Tax Policy Center also cautions, however, that some individuals and households may see a higher tax bill.3 Highlighted below are some of the major changes:
- Reduction in most marginal income tax brackets;
- Near doubling of the standard deduction;
- Elimination of personal exemption;
- A $10,000 cap on the state and local tax deduction;
- An increase in the child tax credit and the expansion of eligible families;
- Mortgage interest deductibility limited to mortgages up to $750,000 (reduced from $1 million);
- Medical expenses deductibility will kick in at 7.5 percent of income, down from 10 percent;
- 529 plans may now be used to fund elementary and secondary education; 4
- AMT is curtailed;
- 401(k) borrowers will have more time to repay plan loans when leaving an employer; 5,6 and
- Elimination of the ability to “undo” a Roth conversion. 7
The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. As such, individuals benefiting from this change may want to re-evaluate the strategies they have in place to address the tax and liquidity issues that may no longer exist.
The nature and shape of the nation’s tax system inevitably influence the everyday decisions made by individuals and businesses alike. After the implementation of one of the most comprehensive reforms in over a generation, it is essential to review certain financial and investment strategies.
If you have questions about how the new tax law will affect your personal financial plan, contact me. These tax changes may have a wide-ranging impact on the financial choices you make. For example, you may want to consider the best use for your additional after-tax income. Keep in mind the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.
1. The Wall Street Journal, December 20, 2017
2. Reuters.com, December 19, 2017
3. Tax Policy Center of the Urban Institute & Brookings Institution, 2017
4. The tax implications of 529 College Savings Plans can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.
5. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 591/2, may be subject to a 10% federal income tax penalty. Generally, once you reach age 701/2, you must begin taking required minimum distributions.
6. A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% tax penalty if the account owner is under 59 1/2. Under the Tax Cuts and Jobs Act, if the account owner switches jobs or gets laid off, the 401(k) loan is eligible for a rollover within 60 days, essentially providing the person more time to repay the loan or manage the tax consequences of non-repayment.
7. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59 1/2. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. The Tax Cuts and Jobs Act repeals the rules permitting the recharacterization of Roth conversions, effective starting in 2018
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.