The big headline from the Tax Cuts and Jobs Act signed into law in December of 2017 has to do with reducing the corporate tax rate from 35 percent to 21 percent. However some provisions relate to individual taxpayers. Before we get into the details, be aware that almost everything listed below sunsets after 2025, with the tax structure reverting to its current form in 2026 unless Congress acts between now and then. The corporate tax rate cut, however, does not sunset. Here are the highlights for individuals:
Estate Taxes. If you weren't worried about federal estate taxes before, you really don't need to worry now. With the federal exemption already scheduled to increase in 2018 to $5.6 million for individuals and $11.2 million for couples, the federal exemption has now nearly doubled this to $11.18 million (estimate) and $22.36 million (estimate), respectively, indexed for inflation. The tax rate for those few estates subject to taxation remains at 40 percent. Two important reminders: (1) the Massachusetts Estate Tax remains in place and impacts estates with assets in excess of $1 million so this will continue to necessitate estate planning; and (2) because of the sunset of the federal exemption in 2025, individuals with assets between $5.6 million and $11.2 million, and married couples with assets between $11.2 million and $22.36 million should consider using this exemption through gifting (weighing of course, the negative consequences of such gifting including the loss of basis adjustments for income tax purposes).
Exemption Planning: Because of the 2025 sunset, married couples will continue to need to plan on using the exemption on the death of the first spouse. For example, if a married couple with $10 million in assets experiences the death of one spouse in 2020 planning measures should still be taken so that if the surviving spouse passes away in 2026, after the sunset and when the exemption could drop from $11.2 million back to the $5.6 million (both numbers possibly being adjusted for inflation) an estate tax of 40% on the excess isn't incurred.
Tax Rates. These are slightly reduced and the brackets adjusted, with the top bracket dropping from 39.6 percent to 37 percent.
Standard Deduction and Personal Exemption. The standard deduction increases to $12,000 for individuals, $18,000 for heads of household and $24,000 for joint filers, all adjusted for inflation. Personal exemptions largely disappear.
State and Local Tax Deduction. Now referred to as "SALT," this is now subject to a cap of $10,000, In Massachusetts, this will impact taxpayers whose property taxes, state income taxes, and even vehicle excise taxes exceed the $10,000 threshold as the amount in excess is essentially wasted.
Home Mortgage Interest Deduction. The limit on deducting interest on up to $1 million of mortgage interest stays in effect for existing mortgages. New mortgages taken on after December 15, 2017, are subject to a $750,000 limit. The deduction for interest on home equity loans disappears.
Medical Expense Deduction. After much outcry in response to the House version of the tax bill, which would have eliminated the medical expense deduction, it survived. And, in fact, it was enhanced by permitting medical expenses in excess of 7.5 percent of adjusted gross income to be deducted in 2017 and 2018, after which it reverts to the 10 percent under existing law.
529 Plans. These accounts permitting tax-free accumulation of capital gains and dividends to pay college expenses can now be used for private school tuition of up to $10,000 a year. 529 Plans can be a great usage of annual exclusion gifts to lower your taxable estate.
Depending on your income and the amount of state and local taxes you have been paying, you may get a small tax cut. The bigger question is how the projected reduction in tax revenues of $1.5 trillion over the next 10 years will be paid for. This amount may simply be added to the deficit, or it may be used as a justification for “entitlement reform,” i.e., cutting Medicare, MassHealth or Social Security.
Estate Taxes. If you weren't worried about federal estate taxes before, you really don't need to worry now. With the federal exemption already scheduled to increase in 2018 to $5.6 million for individuals and $11.2 million for couples, the federal exemption has now nearly doubled this to $11.18 million (estimate) and $22.36 million (estimate), respectively, indexed for inflation. The tax rate for those few estates subject to taxation remains at 40 percent. Two important reminders: (1) the Massachusetts Estate Tax remains in place and impacts estates with assets in excess of $1 million so this will continue to necessitate estate planning; and (2) because of the sunset of the federal exemption in 2025, individuals with assets between $5.6 million and $11.2 million, and married couples with assets between $11.2 million and $22.36 million should consider using this exemption through gifting (weighing of course, the negative consequences of such gifting including the loss of basis adjustments for income tax purposes).
Exemption Planning: Because of the 2025 sunset, married couples will continue to need to plan on using the exemption on the death of the first spouse. For example, if a married couple with $10 million in assets experiences the death of one spouse in 2020 planning measures should still be taken so that if the surviving spouse passes away in 2026, after the sunset and when the exemption could drop from $11.2 million back to the $5.6 million (both numbers possibly being adjusted for inflation) an estate tax of 40% on the excess isn't incurred.
Tax Rates. These are slightly reduced and the brackets adjusted, with the top bracket dropping from 39.6 percent to 37 percent.
Standard Deduction and Personal Exemption. The standard deduction increases to $12,000 for individuals, $18,000 for heads of household and $24,000 for joint filers, all adjusted for inflation. Personal exemptions largely disappear.
State and Local Tax Deduction. Now referred to as "SALT," this is now subject to a cap of $10,000, In Massachusetts, this will impact taxpayers whose property taxes, state income taxes, and even vehicle excise taxes exceed the $10,000 threshold as the amount in excess is essentially wasted.
Home Mortgage Interest Deduction. The limit on deducting interest on up to $1 million of mortgage interest stays in effect for existing mortgages. New mortgages taken on after December 15, 2017, are subject to a $750,000 limit. The deduction for interest on home equity loans disappears.
Medical Expense Deduction. After much outcry in response to the House version of the tax bill, which would have eliminated the medical expense deduction, it survived. And, in fact, it was enhanced by permitting medical expenses in excess of 7.5 percent of adjusted gross income to be deducted in 2017 and 2018, after which it reverts to the 10 percent under existing law.
529 Plans. These accounts permitting tax-free accumulation of capital gains and dividends to pay college expenses can now be used for private school tuition of up to $10,000 a year. 529 Plans can be a great usage of annual exclusion gifts to lower your taxable estate.
Depending on your income and the amount of state and local taxes you have been paying, you may get a small tax cut. The bigger question is how the projected reduction in tax revenues of $1.5 trillion over the next 10 years will be paid for. This amount may simply be added to the deficit, or it may be used as a justification for “entitlement reform,” i.e., cutting Medicare, MassHealth or Social Security.
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