As the ink is drying on the new Tax Cuts and Jobs Act (the Act), there has been a steady stream of praises and criticisms for the legislation on both sides of the aisle. As long as Congress cannot figure out how to cut spending, there will always be winners and losers in any major tax overhaul. Despite the uncertainty of just who will be the benefactors of the tax cuts, according to the Tax Policy Center’s Distributional Analysis of the Conference Agreement for the Act, all income groups will experience an average decrease of federal income taxes of around $1,600. The average savings vary widely depending on one’s current taxable income with the lowest amount adding around $60 of wealth for individuals with incomes less than $25,000 to about $51,000 for taxpayers in the top 1% of taxable income (those with income above $733,000). Individuals with incomes between $48,600 and $86,100 will save about $900 in taxes; those in the fourth quintile (incomes topping out at $149,400) will save $1,810 in taxes; those in the $308,000 to $733,000 income category will realize an average reduction of $13,500 representing a 4.1% savings - the highest among all categories. The Tax Policy Center states that for 2018, 95% of tax filers will see some tax savings under the new plan. Some individuals will experience higher savings after factoring in the repeal of the Affordable Care Act’s individual shared responsibility payment (individual mandate).
Several companies have already put their money where their mouth is in support of the Act by paying year-end bonuses in anticipation of the lower business tax rates. Walmart, the nation’s largest private employer, has announced an increase in their starting minimum wage in addition to bonus payments for existing employees. However, not everyone is enthusiastic about all of the Act’s tax cut provisions. For instance, several governors have come forward to voice their concerns over the new legislation in light of a provision capping state income tax deductions. Governor Andrew Cuomo has announced that New York will file suit challenging the constitutionality of the Act, and incoming governor of New Jersey, Phil Murphy, announced a plan to convert property taxes into charitable gifts to try and soften the blow likely to be felt by upper-income taxpayers in high-tax states. Indeed, the Governors of both New York and New Jersey have passed executive orders requiring their respective municipalities to process prepayments of property taxes made in December of last year, to front-load deductions that will be limited to $10,000 under the new plan for income taxes, sales taxes, and property taxes combined for the calendar year 2018 and beyond. In response to numerous questions regarding the deductibility of such prepayments, the IRS issued guidance on December 27, 2017, clarifying that property taxes must be assessed before a deduction will be allowed. Taxpayers should review their tax bill and/or consult their municipality to determine if an official assessment was made in 2017 to assure deductibility of the prepayments.
Some items that will remain unchanged in the Act include capital gains tax rates, the Medicare surtax (based on 2017 brackets), exclusion of gain on the sale of a primary residence, reduced rate for qualifying dividends, retirement savings contribution limits, student loan interest deduction, and education credits (the tuition and fees deduction that expired at the end of 2016 was not renewed).
The new law is chock-full of provisions that are sure to have some effect on most individuals and businesses. Unfortunately, most of these tax provisions are temporary, requiring steps taken now to be revisited, as the provisions expire, or are modified in the future. For instance, those with existing estate plans are likely to require a revision to their documents based on the dramatic increase in the exemption amount. Many estate plans rely on a formula to shelter estate assets from the estate tax which, if left unaltered, will create unintended consequences for the survivor and beneficiaries. The new law also provides an opportunity for high-net-worth clients to consider gifting strategies to reduce or eliminate gift and estate tax on asset transfers.
The importance of proactive tax and estate planning cannot be overemphasized. Those that take steps now, before engaging in transactions, will be in the best position to maximize the benefits of the new Act. The tax professionals at Reger Rizzo Darnall, LLP can help you navigate the complexities of the new tax legislation and tailor your transactions to ensure both compliance with the rules and utilization of the most tax-favored provisions. For questions, comments or additional information, please contact Rick Marmon at firstname.lastname@example.org or via phone at 856.900.6824.