TAX CUTS AND JOBS ACT OF 2017 (TCJA) and Its Potential Impact

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1 TAX CUTS AND JOBS ACT OF 2017 (TCJA) and Its Potential Impact One of President Trump s major campaign promises was that he would simplify the federal tax code to the point that we could file using a postcard. President Trump s administration presented such a plan on September 27, After much debate between the House and Senate, on December 20, 2017, a tax bill was passed by both houses and was signed by the President on December 22, As we begin to analyze the changes, it s important to understand that for most people TCJA will not affect 2017 tax filings. Additionally, the tax reforms are permanent for corporations while the changes to individual taxes will sunset after 2025 (as we experienced with President Bush s tax cuts in 2001 and 2003). Now the question on many citizens minds is, What impact will the changes have on my family? To answer this question, we begin with a quick summary of the final legislation, followed with a more in-depth look at what this could mean for your financial situation. TCJA Impact at a Glance Tax rates Remain at seven tax brackets with income adjustments for each bracket, reduced rates for most filers. Capital gains and qualified dividends Unchanged. Personal exemptions and deductions Many reduced or repealed, personal exemption rolled into a larger standard deduction. Alternative minimum tax Increased personal income subject to AMT. Tax credits for families Child tax credit increase, non-dependent tax credit. Education No changes to education tax credits or student loan interest deductibility, student loan debt discharged at death or disability excluded from taxable income. Estate and generation-skipping taxes Exclusion doubled. Savings, pensions and retirement Recharacterizations cannot be used to unwind a Roth conversion, but it is still permitted with respect to other contributions such as those used to correct a contribution made over the limits. The qualified rollover period for retirement plan loans is extended. TCJA will effectively repeal the individual mandate in the Patient Protection and Affordable Care Act by reducing the individual responsibility payment to zero for individuals who do not purchase health insurance that qualifies as minimum essential coverage,

2 starting in Things to consider for 2017 The increase in the standard deduction to $24,000 makes it unlikely that you will use itemized deductions after Therefore, you may wish to consider making charitable contributions in 2017 rather than 2018 based on the logic that you will not be using the itemized deductions in In 2016, if you were subject to the Alternative Minimum Tax (AMT), you didn t derive the full benefit associated with tax payments. It is possible that you will derive minimal federal tax benefit for paying property taxes in 2018, as the deduction for a combination of state and local income and sales taxes, plus property taxes will be capped at $10,000. You may derive a tax benefit by paying it in 2017, but that depends on your income level and the amount and type of deductions in Single Filers Income up to $9,525 > $9,525-$38,700 > $38,700-$93,700 > $93,700-$195,450 > $195,450-$424,950 > $424,950-$426,700 > $426,700 Income up to $9,525 > $9,525-$38,700 > $38,700-$82,500 > $82,500-$157,500 >$157,500 to $200,000 > $200,000-$500,000 > $500,000 Heads of Household Income up to $13,600 > $13,600-$51,850 > $51,850-$133,850 > $133,850-$216,700 > $216,700-$424,950 > $424,950-$453,350 > $435,350 Income up to $13,600 > $13,600-$51,800 > $51,800-$82,500 > $82,500-$157,500 >$157,500-$200,000 > $200,000-$500,000 > $500,000 Joint Explanatory Statement of the Committee of Conference regarding the Tax Cuts and Jobs Act (Dec ) These tax brackets will be in place from 2018 through 2025 and will be indexed for inflation using a chained-cpi (believed to be more accurate at representing inflation). Capital Gains and Qualified Dividends Although the TCJA adjusted the income tax rate brackets, capital gains and qualified dividends tax brackets remain unchanged, including the investment surtax of 3.8 percent: Income Levels for Those Filing As: Single Married/Joint Long-term Capital Gains & Qualified Dividend Rates $0-$38,600 $0 to $77,200 0% $38,601 to $452,400 $77,201 to $479,000 Married Joint Filers $452,401 $479,000 20% Income up to $19,050 > $19,050-$77,400 Income up to $19,050 > $19,050-$77,400 $200,000 $250,000 Medicare Surtax on Net Income 3.8% > $77,400-$156,150 > $77,400-$165,000 > $156,150-$237,950 > $165,000-$315,000 > $237,950-$424,950 >$315,000-$400,000 > $424,950-$480,050 > $400,000-$600,000 > $480,050 > $600,000

3 Tax Rates Personal Exemptions and Deductions In an effort to simplify the tax code filing process, several changes were made to exemptions and deductions. Our previous tax law included a personal exemption, which allowed taxpayers to reduce their adjusted gross income (AGI) by $4,050 per person/dependent. For example, a married couple would qualify for a personal exemption of $8,100. This reduction takes place prior to applying either standard or itemized deductions. The TCJA eliminates the personal exemption and rolls it into a larger standard deduction of $12,000 for single filers ($24,000 for joint filers). Taxpayers who currently use the itemized deductions on Schedule A will still be able to do so under the new plan. Following is a list of common deductions and the impact for each: Deduction Current TCJA Mortgage Interest Limited to $1,000,000 of debt principal Existing loans grandfathered. New loans after December 14, 2017, limited to $750,000 of debt principal Property Tax Deductible Combined with sales and income tax and limited to $10,000 Sales and Income Tax Deductible Combined with property tax and limited to $10,000 Charitable Donations Charitable Donations (documentation) Cash donations limited to 50% of taxpayer s AGI Contemporaneous written document required for gifts value over $250 Cash donations increased limitation to 60% of taxpayer s AGI Contemporaneous written document required for gifts value over $250 Medical Expenses Expense threshold of AGI Reduced threshold to 7.5% of AGI for 2017 and 2018 (reverts to threshold in 2019) Casualty losses Miscellaneous Deductions Must be in excess of $100 and only deductible to the extent it exceeds of AGI Itemized deductions that were subject to the 2% of AGI floor (i.e. tax preparation, various unreimbursed employee business expense, trustees fees, investment or advisors fees, etc.) The same, but only if losses are attributable to a declared national disaster area Repealed (no longer deductible) Alimony Deductible to the payor Repealed (no longer deductible for divorce settlement agreements after 12/31/2018 or modified to include this provision in 2019 and after) Joint Explanatory Statement of the Committee of Conference regarding the Tax Cuts and Jobs Act (Dec ) Finally, the Pease limitation on itemized deductions has been repealed by the TCJA. For households with income that exceeds certain thresholds ($254,200 single/$305,050 filing jointly), this provision currently reduces the itemized deductions by 3 percent for every dollar of taxable income, capped at 80 percent of the total value of itemized deductions. Alternative Minimum Tax While one of the major goals of Trump s Tax reform included eliminating the Alternative Minimum Tax (AMT), it was only modified with the TCJA.

4 The AMT exemption has now moved from $55,500 to $70,300 for individuals and from $86,200 to $109,400 for married couples. Additionally, the phase-out for individuals will increase from $123,100 to $500,000 and for married couples it will increase from $164,100 to $1,000,000. Tax Credits Tax credits for families will increase as follows: The child tax credit will increase from $1,000 to $2,000 ($1,400 will be refundable for lowincome individuals). The phase-out for the child tax credit will increase from $75,000 to $200,000 for single filers (from $110,000 to $400,000 for joint filers). These thresholds are not indexed for inflation. The TCJA includes a non-dependent tax credit for college-aged children or elderly parents of $500. As with other individual tax reform changes, these are schedule to sunset in Education While no changes were made to the overall education tax credits or student loan interest deductibility, there was one notable change made to the taxation of discharged debt. Discharged student loan indebtedness at death or total disability will be excluded from taxable income, unless it was forgiven under Federal programs like income-based repayment [IBR], PAYE, or REPAYE. Discharges from these programs remain taxable. Business Tax Reform One of the main goals of the Tax Cut and Job Act is to bring relief to businesses in order to spur job growth. A major focus is on reducing corporate tax rates so businesses can better compete in a global economy. The TCJA lowers taxes for both large corporations and small businesses. This is accomplished through the combination of reducing overall tax rates and modifying deductions, loss carry-over rules, credits and income recognition. Highlights include: Reduction of the corporate tax rate to a flat 21 percent. Elimination of the special corporate tax rate on personal service corporations (C-Corporation) and alignment with the general corporate rate of 21 percent. Repeal of the corporate AMT. Additionally, the final legislation included significant changes to the classification of income as it relates to pass-through entities such as partnerships, limited liability companies (LLCs), S-corporations and sole proprietors filing a Schedule C. Pre-TCJA, the net income of these pass-through businesses (sole proprietorships, partnerships, LLCs, and S corporations) was not subject to an entity-level tax and was instead reported by the owners or shareholders on their individual income tax returns. Thus, the income was effectively subject to individual income tax rates. Moving forward, the tax law is exempting 20 percent of all net business taxable income earned by a sole proprietorship, partnership, LLC, and S corporation. The 20 percent exemption is capped by the greater of the two factors below. 50 percent of the amount of wages paid to employees and reported on a W2; or 25 percent of those wages plus 2.5 percent of the cost of depreciable property owned by the business. The W2 wage limit does not apply if the taxpayer s income is less than $315,000 for married-filingjointly taxpayers or $157,000 for individuals. Also, the 20 percent deduction will be disallowed for specified service trades or businesses with income above this income level. Specified service trades or businesses include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one of its employees.

5 Liked-kind exchanges (1031 Exchange) Currently, any exchange or sale of property is generally taxable; however, a special rule may be applied that ensures no gain or loss is recognized to the extent that the property held for productive use for the taxpayer s trade or business, or property held for investment purposes is exchanged for property of like-kind. The rule applies to a wide range of property, from real estate to tangible personal property. Under the TCJA, the special ruling will only apply to real property. The rule applies to transfers after The Tax Cut and Job Acts tax reform includes sweeping changes that will impact all taxpayers, and is met with mixed reactions from many individuals, business owners and special interest groups. Will we be able to file our taxes on a postcard, as President Trump envisioned? Probably not. At Mariner Wealth Advisors, we are here to help guide clients through these changes. If you have questions on how the TCJA will impact you, please contact your wealth advisor. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guar antee that any claims made will come to pass. The information contained herein is based on sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information. Mariner Wealth Advisors ( MWA ) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply any level of skill or training. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website ( Certain MWA representatives are licensed insurance agents and are compensated for the sale of insurance-related products through an affiliated insurance agency.