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Financial Planning,Taxes

Tax Reform – Potential Winners and Losers

Trump and the GOP have finally released some of the details to their massive tax reform plan.  There are still many details that are missing, and nothing is final, but it’s worth noting a few items in particular that may come into play as you think about the rest of 2017 and beyond.

The Alternative Minimum Tax is Gone!

With the repeal of AMT, this will spell tax relief for many upper middle class families who were paying additional tax compared to the normal tax tables.  This should both lower tax bills and simplify tax returns for many of our clients.  In addition, certain items (notably mortgage interest) that are not deductible under the AMT will be deductible going forward when it is repealed.  

State and Local Taxes will no longer be Deductible!

This is a big deduction for many taxpayers, and although it will be partially offset for some with a higher standard deduction, it will hurt to lose this for many families.  One thing to keep in mind is that unless you are subject to the AMT, this is a deduction you can take for 2017, so you may want to “pre-pay” some of your state taxes for next year during the next two months.  At the very least, make sure that you make all of your 2017 state tax payments in 2017.

Increased Child Tax Credit

The child tax credit would increase from $1,000 per child to $1,600 per child, and there will also be an additional $300 credit for any parent or non-child dependent.  Phase-out limits for the child tax credit are supposedly higher, but no details on this have been released as of yet.  This credit is a bit of fool’s gold, though, as there are no more personal exemptions.  This is an overall win for lower-income families and a loss for higher-income families.  

Increased Standard Deduction

The Standard Deduction is almost doubling to $24,000 for married filing jointly taxpayers.  This is mainly a win for lower income taxpayers who would have been less likely to itemize anyways.  This is combined with the fact that you can’t itemize state and local taxes either.  One of the groups this could really benefit is individuals over the age of 70.5.  Because they can give to charity directly from their IRA and have this count as their Required Minimum Distribution, it will allow more senior taxpayers to give charitably, avoid the income from their RMD, and take advantage of the higher standard deduction. 

One way to take advantage of this for younger taxpayers is to utilize a Donor Advised Fund for charitable giving.  If you are able to plan appropriately, you could double up your giving every other year.  In other words, contribute two years of giving to a DAF in one year, and use it for your charitable gifts over the next two years.  This could enable you to go back and forth between utilizing itemized deductions in the years of gifts and standard deduction in the other years.  You may want to start by pre-funding your gifts for 2018 at the end of this year if you don’t think you’d be able to itemize under the new higher standard deduction levels.  

Small Business Owners Should Have Lower Taxes

This one isn’t as beneficial as originally proposed, but will still be a nice break for business owners.  Under the new plan, 70% of income for Small Business Owners (with a pass-through entity like a Sole Proprietorship, LLC or S Corp) will be taxed at the owner’s normal income rate, while 30% will only be subject to a maximum rate of 25%.  So if you have the ability to push any income off until next year, it may behoove you to do so to get more income taxed at a potentially lower rate.  

This is a high level view, but we’re excited for some new planning opportunities, especially as we think through transitioning from one tax code to another.  Please keep in mind that you should contact your tax professional for specific tax advice for your situation.  At the same time, we’d be glad to talk through some financial planning opportunities that you may want to consider, especially before year end.  Give us a call today!