A new year, a new approach to taxes in the U.S.
Late last year, the Republican-controlled Congress enacted some of the most significant tax law changes since the mid-1980s, and now corporations and individuals are scrambling to discover what the new system will mean for them. Like many other legal and financial professionals, our office is analyzing the scope of the changes and evaluating what they mean for our clients. A summary of the most significant changes for individuals and families are:
The New Brackets
Among the most significant of the changes, new tax law makes a direct impact on personal income brackets reducing the marginal rates (with a new maximum rate of 37% instead of 39.6%). This is a significant change that, potentially, could save money for high-net-worth and ultra-high-net-worth clients.
Marriage Penalty Significantly Reduced
The Marriage Penalty in the United States refers to the higher taxes required from some married couples with both partners earning income that would not be otherwise required from two single, individual filers. For example, let’s say that two taxpayers filing individually each earned $90,000. Until the old tax brackets, they would have fallen into the 25% bracket. If, however, they chose to file jointly, their combined income would have put them into the 28% bracket. Because, under the new system, the income thresholds were revised to be exactly double the amount of the individual thresholds for most taxpayers, it means the marriage penalty has been all but eliminated (provided you earn under $400,000 of income per year).
Standard Deductions and Personal Exemptions
Under the new system, the Standard Deduction has been doubled for all filers and the personal exemption has been eliminated. While this can be good news for some filers (as it will double the standard deduction), ultimately it means that many taxpayers who have itemized deductions in prior tax years may no longer need to do so (and could benefit by simply claiming the standard deduction).
Capital Gains Tax Changes
For investment income, the government charges a special tax known as a Capital Gains tax. With investments longer than 1 year, taxpayers pay a “long-term” capital gains tax; for investments shorter than 1 year, taxpayers pay a “short-term” tax. Short-term capital gains are taxed at your ordinary income rate while long-term gains are taxed at a special rate set by the government. Those rates are either 0%, 15%, or 20%, depending upon what your “regular” marginal tax rate you pay. While the tax rates and general structure is the same, under the new 2018 rules, the IRS will apply the rates a little differently than they previously did. Most high-net-worth taxpayers will not notice any significant difference while some lower or mid-level tax payers will see a slight change.
Child Tax Credit Expanded
Parents with total taxable income under $400,000 will now see a slightly expanded and revised tax credit for each child under 17 years old. Under the previous law, anyone with income under $110,000 could qualify for this $1,000 credit (which is partially refundable) but, now, the credit has been doubled to $2,000 and the availability of the credit broadly expanded to parents with combined income up to $400,000.
Mortgage, Charitable, and Medical Deductions
While most of these deductions remain unchanged, slight tweaks have been made to each. Mortgage interest may only be deducted up to $750,000 (lowered from $1 million), charitable deductions may be made up to 60% of your income (increased from 50%), and qualifying medical expenses have been slightly reduced.
Obamacare Penalty Eliminated (2019)
Under the Affordable Care Act (aka “Obamacare”), individual tax payers who refused to purchase qualifying health insurance faced a tax penalty. Although Republicans could not completely repeal the healthcare legislation, they did the next best thing and eliminated the individual mandate by revoking the portion of the law that charged a tax penalty if a taxpayer didn’t purchase insurance. Caution: this change goes into effect in 2019 so a penalty may still be assessed in 2018.
Pass-Through Tax Deduction (Pay Attention Business Owners)
Perhaps one of the most exciting new aspects of the tax law change is the new Pass-Through Tax Deduction for business owners. A pass-through tax entity is a type of legal entity where tax affects your business pass-through on a pro rata basis to the owners of the business (for example, as an owner your income, loss, deduction, or credit passes through to you in the proportion you own the business; if you’re a 50% owner of a business, half of the income passes through to you). Common pass-through entities are Limited Liability Companies.
Under the new tax law, taxpayers with pass-through entities will be able to deduct 20% of their pass-through income. Be warned: like other areas of taxation, there are income limits (also known as phaseouts) that apply to certain professional services businesses (like lawyers).
Estate Tax Exemption
Previously, a U.S. citizen could pass tax-free (either by gift or death) up to $5.6 million to heirs or beneficiaries through lifetime gift(s) or at death. Now, that number will has been expanded to $11.2 million per individual, $22.4 million per couple. For high-net-worth clients, this means your family will be able to keep more of your estate before the government takes its share.
Some individuals avoid this by making annual gifts to family. The Annual Gift Tax Exclusion, which enables a U.S. citizen to give monetary gifts to an unlimited number of people, increases from $14,000 to $15,000 per individual recipient. This is just one of the adjustments enacted to account for inflation.
Consider Your Gifts
An article in Forbes.com, outlines the new changes in estate tax and highlights some options families have in designating and structuring gifts. One reference includes the follow choices:
- Making gifts to existing or new irrevocable trusts, including generation-skipping trusts
- Leveraging gifts to support the funding of life insurance or existing sales to trusts and
- Pairing gifts with philanthropy (such as a charitable lead trust)
Of course, you’ll want to work with your estate planning attorney to find out what changes, if any, you should make to your will and decide if the value of your estate and what you plan to pass on warrants making these gifts.
How All This Will Impact You
Although the tax rules are applicable to all equally, everyone’s tax situation is different and can vary wildly. For many of our clients, the very best way to ensure you are protected and ahead of the curve is to understand the changes in the law and work with a financial and estate planning team who are experts in the field. Our firm routinely works closely with Certified Public Accounts and Financial Professionals for the benefit of our clients.
I encourage you to stop waiting and reach out to a board-certified estate planning attorney today and talk about your options. Our firm offers a FREE consultation and you can schedule an appointment by clicking the link at the top of this page or by calling us at (214) 974-8940. We’ll answer any questions you have, elaborate further on any of the tax changes I’ve touched on here, and provide you with sound insight on the best options for you and your family.
ATTORNEY CHRIS PARVIN is Board Certified in Estate Planning & Probate Law by the Texas Board of Legal Specialization. Mr. Parvin is the Managing Partner of the Dallas, Texas law firm of Parvin Law Group, P.C. and serves as an Adjunct Professor of Law at Texas A&M University School of Law. Mr. Parvin can be reached by email at email@example.com.
Parvin Law Group, P.C. is a Concierge Law Firm in Dallas, Texas with attorneys practicing law in the fields of Estate Planning, Probate, and Business Law.