Over 80% of Americans will get a tax cut in 2018, while just 5% of taxpayers are expected to pay more (Tax Policy Center, Washington Post). In most cases, cuts are expected to be modest; however, much will depend on individual circumstances.
Here’s what you need to know about these changes and how it applies to you during tax year 2018:
The 10% bracket remains unchanged, while the 15% bracket declines to 12%, the 25% to 22%, the 28% to 24%, the 33% to 32%, the 35% holds steady, and the 39.6% slips to 37%. The thresholds are modestly adjusted above the new 22% bracket.
The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filers, reducing the incentive to itemize and simplifying for some taxpayers.
Those in high-tax states could see the biggest hit, as there will be a $10,000 cap on state, local and property tax deductions.
Exemptions & Charitable Contributions:
The $4,150 personal exemption is eliminated, and the $1,000 child tax credit doubles to $2,000. In general, rules for charitable contributions remain unchanged.
The estate tax survived, but the exemption will double from $5.6 million to $11.2 million, and $11.2 million to $22.4 million for couples.
Investing & Retirement Accounts:
For investors, the preferential treatment for long-term capital gains and dividends remains intact, as is generally the case for retirement accounts. One important change – the new law repeals rules that allow for recharacterizations of Roth conversions back into traditional IRAs. Once you convert into a Roth, there’s no going back.
The new tax bill repeals the Obamacare mandate that requires all individuals to obtain health insurance. It becomes effective 2019. While the 3.8% Medicare surtax on investment income for high-income taxpayers was retained. It’s important to point out that many of the more popular changes in the tax code for individuals will sunset in 2025.
Business Tax Rates
Given that the 21% corporate tax rate applies only to C-corps, there will be a 20% deduction for pass-through entities, such as S-corps, partnerships, and LLCs. This should be a welcome benefit for many business owners, but complex rules may limit the pass-through for some entities.
From an economic standpoint, Congress and the president hope that the changes, especially as they relate to business, will encourage firms to open new plants, expand in the U.S., and level the playing field with the global community.
About 90% of economists surveyed by the Wall Street Journal expect a modest boost to growth in 2018 and 2019, but after that, opinions diverge. If tax incentives boost productivity, it could lift long-run GDP potential, which would yield a significant benefit. Early anecdotal data offer some encouragement, as several large firms announced year-end bonuses or wage hikes tied to the lower corporate tax rate. However, if the economic benefits end after a two-year sugar high, it will likely be deemed a failure.
At a minimum, the lower tax rate increases longer-run after-tax earnings, which played a big role in the late-year stock market rally. It could also boost corporate stock buybacks and dividends going forward, which would create an added tailwind for stocks.
About the author: Financial adviser, retirement wealth strategist, founder of Strategy Financial Group and author of “Climbing the Retirement Mountain,” Calvin Goetz is an Investment Adviser Representative who holds the Series 65 securities license, is life and health insurance licensed in the state of Arizona and is a member of Ed Slott’s Elite IRA Advisor Group™ and the National Association of Insurance and Financial Advisors (NAIFA). For more information, visit StrategyFinancialGroup.com.