The New 2017 Tax Reform Bill, Part 1

January 29, 2018 Eric Maldonado

Perspectives from a Financial Advisor

As of December 20, 2017, the Senate passed the "Tax Cuts and Jobs Act.” Most would agree that this is the most sweeping overhaul of the US tax system in more than 30 years.

The question we are all asking is “how does this impact me and my family?”

Well, that’s a challenging one to answer because everyone is different, but let’s examine the changes from 30,000 feet.

[Token Disclaimer: This is not considered tax advice – you should consult your advisor (me) to determine how it might impact you personally.]

10 Highlights of the Bill:

1. The bill would create a single corporate tax rate of 21%, beginning in 2018, and repeal the corporate alternative minimum tax. Unlike tax breaks for individuals, these provisions would not expire.

2. The bill would retain the current structure of seven individual income tax brackets, but in most cases, it would lower the rates:

the top rate would fall from 39.6% to 37%;
the 33% bracket would fall to 32%;
the 28% bracket to 24%;
the 25% bracket to 22%;
the 15% bracket to 12%; and
the lowest bracket would remain at 10% and the 35% bracket would remain unchanged.

3. The bill would raise the standard deduction to $24,000 for married couples filing in 2018 (from $13,000 under current law), to $12,000 for single filers (from $6,500), and to $18,000 for heads of household (from $9,550). These changes would expire after 2025.

4. The bill would end the individual mandate, a provision of "Obamacare" that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. While the mandate would technically remain in place, the penalty would fall to $0.

5. The bill would temporarily raise the child tax credit to $2,000 from $1,000, with the first $1,400 refundable, and create a non-refundable $500 credit for non-child dependents.

6. The bill would limit the application of the mortgage interest for married couples filing jointly to $750,000, down from $1,000,000.

7. The bill would cap the deduction for state and local taxes at $10,000 through 2025.

8. The bill would temporarily raise the exemption amount and exemption phase-out threshold for the Alternative Minimum tax – for married couples filing jointly, the exemption would rise to $109,400 and phase-out would increase to $1,000,000.

9. The bill would temporarily raise the estate tax exemption for single filers to $11.2 million from $5.6 million in 2018, indexed for inflation. This change would be reversed after 2025.

10. Improves savings vehicles for education by allowing families to use 529 accounts to save for elementary, secondary and higher education.

Implications for the US Economy?

The big question is how much economic growth the new bill will create, thereby offsetting the increase to the federal deficit. The short answer is that no one knows with any certainty.

Treasury Secretary Steven Mnuchin predicts a “net reduction” to the national debt as a result of the new bill.

The bill is complicated and long – at least 500 pages at last count. In addition, many of the changes, especially the personal tax breaks, are considered temporary – meaning they go into effect in 2018 but expire after 2025. (The reason for this expiration date is because it allows the Senate to comply with what we might consider odd "reconciliation" rules that block a Democratic filibuster, which the Republicans would not have enough votes to overturn.) The Republicans have vowed to make the changes permanent – but let’s wait and see what happens …

Final Thoughts

There are a ton of other changes to the tax bill as well as changes that were proposed in earlier versions that were nixed in the final bill. For example, the original version proposed changes to Health Savings Accounts, but the final version does not.

There were discussions that the traditional 401(k) contribution limits would fall, but the final bill has those limits at $18,500 or $24,500 for those aged 50 or older in 2018.

It’s important to consult your advisor (me) to determine how this new tax bill might impact you and your family.

- Eric Maldonado, CFP®, MBA