What will the near-term impact be?

 Provided by Marc Aarons @ Money Managers Inc.

 On December 20, Congress passed the Tax Cuts & Jobs Act, sending the final version of the GOP tax reform bill to President Trump’s desk. The legislation alters the Internal Revenue Code to a degree unseen since the 1980s, altering income tax brackets, marginal tax rates, key deductions and exemptions, and the taxation of corporations and pass-through businesses. These are just some of the adjustments.¹

How many taxpayers could benefit from all this reform in 2018? Earlier this month, the financial website Business Insider ran some numbers to see how single, childless taxpayers earning $25,000, $75,000, and $175,000 a year would fare in the wake of the reforms. It did so for both the House and Senate versions of the bill. The final Tax Cuts & Jobs Act is based on the Senate version, and under the Senate tax plan, Business Insider projected 2018 tax savings of $369 for a childless taxpayer at the $25,000 level, $2,129 at the $75,000 level, and $5,240 at the $175,000 level. The calculations assumed these taxpayers would use the standard deduction in 2018, rather than itemize.²

Using the same three income levels, and again assuming use of the enlarged standard deduction, it also projected 2018 federal income tax savings for families of four with children no older than 16. With the Senate bill as the model, the projected 2018 tax savings were $100 for such a family at the $25,000 level, $2,244 at the $75,000 level, and $3,095 at the $175,000 level.³

Retirees are also poised to receive significant tax savings. The non-partisan Tax Policy Center projects an average tax savings of $1,000 for older Americans when they file their 2018 federal taxes in 2019. For seniors earning between $33,000-$56,000, the TPC forecasts a federal tax cut of around $300 (roughly 9%). Seniors earning less than $33,000 currently pay little or no federal income tax and would see little or no benefit from the changes.⁴

One interesting detail in the Tax Cuts & Jobs Act has merited little coverage. That is the application of the chained Consumer Price Index to the Internal Revenue Code – a move which affects inflation calculations. The chained CPI usually reflects less inflation than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-U), upon which Social Security cost-of-living adjustments are based. This raises the possibility of smaller Social Security COLAs in the future. At this point, Social Security COLAs are not dependent on the movement of the chained CPI.⁵

The passage of the reforms also opens a door to new conversations about Medicare, Medicaid, and Social Security reform, as the national debt is projected to increase by more than $1 trillion with the new legislation.^4,5

Households may want to make some moves before the new rules take effect. As marginal tax rates are reduced for 2018, some taxpayers might want to defer a little income into next year. The charitably minded may end up contributing more to qualified non-profit organizations in 2017 than in 2018, as the value of itemized deductions will be greater this year with a lower standard deduction. Lastly, those who like to itemize may be compelled to prepay 2018 property taxes before this year ends, given the $10,000 cap on the state and local taxes deduction in 2018.⁶

The Internal Revenue Service has quite a challenge on its hands. Web pages, forms, and publications need to be revised and the agency faces immediate pressure to issue new withholding tables. On December 17, the I.R.S. stated that worker paychecks would not reflect the impact of the Tax Cuts & Jobs Act until February – which means employees may have to make late-2018 withholding adjustments.⁷

Tax season is almost here, so talk with your CPA or preparer soon. A conversation may reveal new opportunities for savings, and help you identify your tax planning priorities for the near future.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

MMI Disclosures

Citations.

1 – cbsnews.com/news/second-house-vote-new-tax-bill-2017-12-20-live-updates/ [12/20/17]

2 – businessinsider.com/trump-tax-plan-take-home-pay-2017-9 [12/2/17]

3 – businessinsider.com/senate-tax-plan-affects-family-take-home-pay-2017-11 [12/2/17]

4 – forbes.com/sites/howardgleckman/2017/12/15/what-the-gop-tax-cut-will-mean-for-older-adults/ [12/15/17]

5 – fool.com/retirement/2017/12/18/the-1-gop-tax-provision-social-security-recipients.aspx [12/18/17]

6 – cbsnews.com/news/3-moves-to-make-by-end-of-2017-if-gop-tax-bill-becomes-law/ [12/19/17]

7 – nytimes.com/2017/12/18/business/irs-tax-bill.html [12/18/17]

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

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What is in it? What could its changes mean for you, if they become law?

Provided by Marc Aarons @ Money Managers, Inc.

Major changes may be ahead for federal tax law. At the start of November, House Republicans rolled out their plan for sweeping tax reforms. Negotiations may greatly alter the content of the bill, but here are the proposed adjustments, and who may and may not benefit from them if they become law.

The corporate tax rate would fall from 35% to 20%. Wall Street would cheer this development, perhaps with a significant rally. Sole proprietorship, partnerships, and S corporations would also see their top tax rate drop to 25% (although W-2 wages for business owners who invest in these pass-through entities would still be taxed at the owner’s marginal tax rate).

The estate tax and Alternative Minimum Tax would be eliminated. The AMT would die immediately, saving more than 5 million high-earning taxpayers from an annual bother. Death taxes would sunset within six years, and in the interim, the estate tax exemption would be doubled, leaving the individual exemption at about $11 million. This would be a boon for many highly successful people and their heirs.

Personal exemptions would go away, but the standard deduction would nearly double. The loss of the personal income tax exemption (currently $4,050 per individual claimed) would be countered by standard deductions of $12,000 for individuals and $24,000 for married couples. This could lessen the tax burden for many middle-class households. On the downside, the larger standard deduction might reduce the incentive to donate to charity.

Only four income tax brackets would exist. While the top marginal tax rate would remain at 39.6%, the other brackets would be set at 12%, 25%, and 35%. Individuals earning $45,000 or less and spouses with combined earnings of $90,000 or less would fall into the 12% bracket. Households earning less than $260,000 would be in the 25% bracket. The individual threshold for the 39.6% bracket would be moved up to $501,000 from the current $418,401; it would apply to couples who earn more than $1 million.

Some state and local tax deductions might vanish. Taxpayers who face higher state income tax rates – such as those living in New York, California, and New Jersey – could lose a big tax break here. The reform bill’s author, House Ways & Means Committee Chair Kevin Brady (R-TX), says that a new revision to the bill would at least let homeowners deduct state and local property taxes up to a $10,000 cap.

Speaking of caps, the mortgage interest deduction would be halved to $500,000. Real estate investors, developers, and agents are unhappy with this idea, as the current $1 million mortgage interest deduction has helped to spur home buying.

Some key itemized credits and deductions would disappear. Among those the bill would do away with: the medical expense deduction, the moving deduction, the student loan interest deduction, the deduction on alimony payments, the electric vehicle deduction, and the tax credit drug manufacturers rely on as they undertake clinical trials. Retirees, divorcees, college grads, and pharmaceutical companies could see some financial negatives.

Private college endowments would be taxed. With the aim of generating $3 billion in revenue over the next ten years, the bill would impose a 1.4% federal excise tax on private colleges and universities with 500 or more students and assets equivalent to or greater than $100,000 per full-time student.

The Child Tax Credit would grow. Families eligible to claim the credit would see it rise to $1,600 from the current $1,000.

Hardship withdrawals from workplace retirement plans could become larger. Currently, plan participants who take hardship withdrawals are only allowed to withdraw their contributions, not both their contributions and earnings. The new reform bill would lift that restriction. In addition, a worker with an outstanding loan from a workplace retirement plan who loses his or her job would have until April 15 of the following year to repay the loan balance, as opposed to the current 60 days.

Representative Name: Marc Aarons, 714-887-8000 or marc@ocmoneymanagers.com

^{_{MMI Disclosures}} 

^_Citations.

^{_{1 – nytimes.com/2017/11/02/us/politics/republican-tax-plan-winners-losers.html [11/2/17]}}

^{_{2 – kiplinger.com/article/taxes/T055-C032-S014-3-game-changers-for-investors-in-house-tax-plan.html [11/3/17]}}

^{_{3 – businessinsider.com/trump-gop-tax-reform-plan-bill-text-details-rate-2017-10 [11/2/17]}}

^{_{4 – chicagotribune.com/business/ct-biz-gop-tax-bill-401k-changes-20171103-story.html [11/3/17]}}

^{_{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}}   

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