Individuals need to run their numbers to try to get a better understanding of how the changes in the new Tax Cuts and Jobs Act will impact them, Jim Holtzman, a wealth manager and shareholder of Pittsburgh-based RIA firm Legend Financial Advisors, emphasized during a webinar he conducted Thursday to address the implications of the federal tax reform.
Although “the ink’s barely dry at this point on the current bill,” he said, it’s important to also keep an eye on aspects of the new legislation that could end up changing. For example, he noted there is already much talk about adjusting the new $10,000 deduction cap for the combination of state and local income taxes and real estate taxes. “I would definitely anticipate during this year this is going to be kind of a moving target,” he said.
Holtzman pointed out that while the corporate tax reforms in the law are permanent, most of the changes for individual taxpayers are scheduled to sunset after 2025. He encouraged attendees to closely look at the changes to the tax rate schedules for 2018. A key takeaway for trusts and estates, he said, is their top tax bracket still begins at a very low level of taxable income (more than $12,501).
Standard deductions will nearly double in 2018, compared to 2017, for married/joint, single and head-of-household filers. But with personal exemptions going away in 2018, this could result in higher taxable income for families that previously took exemptions for many children, he said. Taxpayers may be able to somewhat offset this with the child tax credit, which he noted is doubling from $1,000 to $2,000.
Among other changes, interest deductions will be limited to the first $750,000 of debt for mortgages entered into after December 15, 2017. Existing mortgage balances of up to $1 million are grandfathered, he said, and two homes can still be used to reach these thresholds. Interest deductions are being eliminated for home equity indebtedness—borrowing that is secured by a home and is used for anything other than acquiring, building or substantially improving a residence.
Starting in 2018, cash donations to public charities will be deductible for up to 60 percent of adjusted gross income (AGI), an increase from 50 percent under the old law. But sports fans may no longer take a charitable deduction of 80 percent (or any amount) of the money they pay to universities for the right to purchase athletic tickets, added Holtzman.
Medical expenses will be deductible for 2017 and 2018 as long as they exceed 7.5 percent of AGI, he said. After 2018, this figure returns to 10.0 percent. The new legislation eliminates a penalty for individuals who don’t have health insurance in 2019, although, he said, “I have a feeling this is going to end up changing.”
Another new provision is that 529 college savings plans can now be used to fund tuition of up to $10,000 per child per year at private schools for kindergarten through 12th grade. The tax reform legislation also permits families to roll over 529 plans to ABLE accounts for beneficiaries with disabilities.
For divorces entered into after 2018, alimony will no longer be taxable for the recipient, noted Holtzman, and deductions will be disallowed for the payor. Moving expenses will no longer be deductible, except for members of the armed forces who are moving under military orders.