Tax Reform: What Made It Into the Law, and What Does It Mean?
After months of hashing and rehashing what was (or wasn’t) in the tax reform bill — complete with what seemed like minute-to-minute cable news updates — some people may be confused by what ended up in the final legislation, and, more importantly, what the ultimate impact could be.
When you sift through many of the provisions that affect the average taxpayer, much of it is a wash. For example, there were many smaller deductions eliminated, but when paired against the almost-but-not-quite-doubled standard deduction, the result may end up being close to even.1
Congress retained some of the big-ticket deductions that were so controversial, such as the mortgage and state income tax deductions. There are limits to the amounts that can be deducted, and they will likely impact taxpayers in certain states, but most taxpayers will still be able to claim their previous deductions, or much of them.2
One questionable claim many public officials made was that this tax law will simplify filing. It may be a matter of perspective; there are still seven income brackets, and they changed to some extent. For example, the highest bracket was reduced from 39.6 percent to 37 percent, and the lower limit of this topmost bracket won’t kick in until taxable income spills past $500,000 (single filer) or $600,000 (married, filing jointly), but lowering or raising taxable income limits doesn’t inherently “simplify” the filing process.3
While many taxpayers will see some changes to the way they file or their tax bracket structure, relatively few will be greatly impacted by the tax rates and bracket changes. However, there will be some specific taxpayers significantly impacted — negatively or positively — depending on their individual circumstances. It’s just difficult to tell at this point who will be affected and by how much. Although we’re a year away from the 2018 filing season, where taxpayers will really have to address these changes, it’s a good idea to meet with a qualified tax advisor to assess how the new tax law could impact your situation and consider any adjustments you can make now to help mitigate any possible adverse tax consequences later.
1 Paul Katzeff. Investor’s Business Daily. Dec. 22, 2017. “6 Big Rule Changes for Individuals in The New Tax Bill.” https://www.investors.com/etfs-and-funds/personal-finance/5-big-rule-changes-for-individuals-in-the-new-tax-bill/. Accessed Jan. 19, 2018.
How New Tax Rules Could Affect Investors’ 2018 Filings
For investors, the new tax law did not change the long-term capital gains rates, but they did change the income thresholds to which those rates apply. Specifically:1
- 0% rate — income up to $38,600 (single filers); up to $77,200 (joint filers)
- 15% rate — income range $38,601 to $425,800 (single); $77,201 to $479,000 (joint)
- 20% rate — income above $425,800; above $479,000 (joint)
Be aware the short-term capital gains will continue to be taxed at the investor’s ordinary income tax rate, which may change depending on which tax bracket they land in by year-end.
Another change: once an investor makes a Roth conversion, he can’t change it back. Some investors used what was called a “recharacterization of a Roth IRA” conversion tactic to reverse their Roth conversion after a market correction that would have resulted in the investor paying more in capital gains taxes because they’re based on a higher value than what the assets were worth after the market decline. Investors can no longer do this; a Roth IRA conversion will be irreversible from now on.2
College savings 529 plans were also expanded — they’re not just for college anymore. Investors can now use these investment accounts to stash away money for tax-free growth when used to pay for tuition for elementary or secondary public, private or religious school — up to $10,000 per year.3 In other words, investors can use tax-free earnings to help pay for their children’s private school education, in addition to college costs.
As far as estate considerations are concerned, the goalposts have been moved a bit. You can now gift $15,000 per person a year (up from $14,000) without it counting against your lifetime exemption. Furthermore, the federal estate tax exemption will roughly double to $11.2 million per person ($22.4 million per couple), indexed to inflation.4 Be aware, however, that without further congressional changes this amount will revert to the 2017 estate tax exemption of $5.49 million after 2025.
Finally, the minimum income level for the alternative minimum tax (AMT) to become a factor has increased. Starting with the 2018 tax filing season, the AMT will apply to taxpayers with taxable income from $70,300 to $500,000 (single) or $109,400 to $1 million (married couples filing jointly).5
1 Tina Orem. NerdWallet.com. Dec. 22, 2017. “2017-2018 Capital Gains Tax Rates — and How to Avoid a Big Bill.” https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/. Accessed Jan. 29, 2018.
2 Paul Katzeff. Investor’s Business Daily. Dec. 22, 2017. “6 Big Rule Changes for Individuals In The New Tax Bill.” https://www.investors.com/etfs-and-funds/personal-finance/5-big-rule-changes-for-individuals-in-the-new-tax-bill/. Accessed Jan. 19, 2018.
3 Darla Mercado. CNBC. Dec. 29, 2018. “This tax bill provision helps families save on school costs and taxes.” https://www.cnbc.com/2017/12/29/tax-bill-529-plan-provision-helps-families-save-on-school-costs-taxes.html. Accessed Feb. 22, 2018.
4 Nina Mitchell and Jason Greenberg. WTOP. Jan. 10, 2018. “What the new tax law means for your 2018 finances.” https://wtop.com/business-finance/2018/01/what-the-new-tax-law-means-for-your-2018-taxes/. Accessed Jan. 20, 2018.
5 Jeanne Sahadi. CNN Money. Jan. 18, 2018. “Why you probably won’t have to pay the AMT again.” http://money.cnn.com/2018/01/18/pf/taxes/2018-amt-exemption-increase/index.html. Accessed Feb. 8, 2018.
401(k) Loans Get an Extension
The new tax law offers good news for people who have an outstanding loan from their 401(k) plan. In the past, if a worker left or lost his job with an outstanding 401(k) loan, he would have had to pay the balance back within 60 days or the amount would be considered a taxable distribution — with an additional 10 percent penalty for an early withdrawal.
Now, the borrower has up until the tax-filing deadline to pay back the loan without this consequence. Depending on his personal circumstances, that could give the investor a year or more to pay back the loan without tax consequences.1
This information is not intended to provide tax advice. Individuals are encouraged to consult with a qualified professional before taking any loans or withdrawals from their retirement assets.