by Carolyn Rothwell on January 11, 2018

Tax Cuts and Jobs Act & Financial Planning Software Updates


The Tax Cuts and Jobs Act (TCJA) was signed into law December 22nd. Tax law changes take effect January 1, 2018. A majority of the tax law changes applying to individuals are not permanent and are scheduled to sunset after 2025, reverting to the law in effect prior to the TCJA. The major changes to individual tax planning stemming from the new tax legislation are included below. Details of the tax laws can be found by reading the final bill and the Joint Explanatory Statement of the Committee of Conference.

The new legislation requires significant changes to the tax calculations in Money Tree's financial planning software, impacting the timeline for the 2018 tax update. The tax changes are the top priority for the software and development is underway.


Jump To:

Federal Tax Rates and Brackets:

The number of brackets remains the same at seven, but the income thresholds and the rates have changed. Most notably, the top rate has reduced from 39.6% to 37%, and the threshold to reach the top rate has increased. The marginal tax rates fall for most thresholds, but not all. The 35% rate starts at a lower threshold of $400,000 for married filers (vs. $424,950 under prior law) and $200,000 for single filers (vs. $424,950 under prior law). The thresholds for married filers are double that of single filers, except for the top level, meaning there is still a "marriage penalty" for the highest income earners.

Single Filing Status
Prior Law Tax Cuts and Job Act
Bracket Rate Rate Bracket
$0
$9,526
$38,701
$93,701
$195,451
$424,951
$426,701
- $9,525
- $38,700
- $93,700
- $195,450
- $424,950
- $426,700
+
10%
15%
25%
28%
33%
35%
39.6%
10%
12%
22%
24%
32%
35%
37%
  $0
  $9,526
  $38,701
  $82,501
  $157,501
  $200,001
  $500,001
- $9,525
- $38,700
- $82,500
- $157,500
- $200,000
- $500,000
+

Married Filing Jointly Status
Prior Law Tax Cuts and Job Act
Bracket Rate Rate Bracket
$0
$19,051
$77,401
$156,151
$237,951
$424,951
$480,051
- $19,050
- $77,400
- $156,150
- $237,950
- $424,950
- $480,050
+
10%
15%
25%
28%
33%
35%
39.6%
10%
12%
22%
24%
32%
35%
37%
$0
$19,051
$77,401
$165,001
$315,001
$400,001
$600,001
- $19,050
- $77,400
- $165,000
- $315,000
- $400,000
- $600,000
+

Qualified Dividends and Long-Term Capital Gains 

Qualified Dividends and Long-Term Capital Gains taxation rates are unchanged, with a top tax rate of 20%.

Net Investment Income Tax (NIIT)

Net Investment Income Tax remains unchanged, at 3.8% for incomes above the threshold amounts.


Standard Deductions and Exemptions:

Significant changes have been made to standard deductions and exemptions. Standard deductions have nearly doubled. It is expected 94% of Americans will use the standard deduction versus itemizing in 2018. 

Personal Exemptions

Personal exemptions are suspended. Personal exemptions had been $4,150 for 2018 under the prior law.

Prior Law Tax Cuts and Job Act
Personal Exemption Personal Exemption
 $4,150 Suspended

Standard Deductions

Standard deductions have nearly doubled from prior levels.

Single Filing Status
Prior Law Tax Cuts and Job Act
Standard Deduction Standard Deduction
 $6,500 $12,000

Married Filing Jointly Status
Prior Law Tax Cuts and Job Act
Standard Deduction Standard Deduction
 $13,000 $24,000

Itemized Deductions:

Itemized deductions include important changes to highlight.

State and local taxes (SALT) 

State and local taxes (SALT) can still be itemized, but are now capped at a total of $10,000.

Mortgage Interest

Mortgage interest can still be itemized, but the amount of deductible mortgage interest on loans opened after December 15, 2017, is restricted to $750,000, down from the previous level of $1,000,000. Interest on home equity loans is no longer deductible, on new or existing loans.

Update: Interest on home equity loans can still be deductible when the new restrictions in place requiring the loan to be used to buy, build or improve the home that secures the loan are met.  See IRS news release: Interest on Home Equity Loans Often Still Deductible Under New Law for details. 

Charitable Donations

The charitable donation deduction limit for cash contributions has increased from 50% of AGI to 60% of AGI.

Medical Expenses

Medical expenses exceeding 7.5% of AGI can be deducted. However, the deduction level will revert to 10% of AGI in 2019.

Miscellaneous Itemized Deductions

Miscellaneous itemized deductions are suspended. Items falling under this category, including tax preparation fees, investment management fees, employee business expenses, are no longer deductible.

Pease Provision

Phaseout of itemized deductions, known as the Pease provision, is suspended. This provision reduced itemized deductions for taxpayers with income exceeding threshold amounts.


Child Tax Credit:

The maximum child tax credit doubled from $1,000 to $2,000 per child. Up to $1,400 of the credit is refundable per child. The phaseout thresholds are increased. The credit phaseout kicks in for taxpayers with AGI exceeding $400,000 for married filers and  $200,000 for single filers. The phaseout thresholds are not set to index for inflation.


Alternative Minimum Tax (AMT):

AMT will affect fewer taxpayers due to increased exemptions. The AMT exemption amount increased to $109,400 for married taxpayers and $70,300 for single taxpayers. The phaseout thresholds increased to $1,000,000 for married taxpayers and $500,00 for single taxpayers. The amounts are indexed for inflation.


Estate Tax:

Estate tax was not eliminated, but the applicable exclusion amount doubled to $11,200,000.  With the portability of unused estate tax exclusion amounts between spouses, married couples can have estate values of up to $22,400,000 without facing federal estate tax. 

Prior Law Tax Cuts and Job Act
Estate Exclusion Per Person Estate Exclusion Per Person
 $5,600,000
$11,200,000

 


Additional Noteworthy Items:

Deductions for Qualified Business Income

The new tax law provides a deduction for up to 20% of the qualified business income from flow-through entities (including sole proprietorships, partnerships, S-Corporations and LLCs).  This provision is complicated with restrictions, exclusions, phaseouts, and limits.  

The deduction is subject to phaseout provisions for service related businesses, which includes business providing services in the fields of health, law, consulting, athletics, financial services or brokerage services, or where the primary asset of the business is the skill of its employees or owners.  The 20% deduction is allowed for taxpayers with taxable income below $315,000 for married filers and $157,500 for single filers before a phaseout kicks in.   

Residence Sale Exclusion

The amount of the exclusion remains the same, $500,000 for married taxpayers and $250,000 for single taxpayers, but the length of time a taxpayer must own and use a residence to qualify for the residence sale exclusion has increased from prior law. The exclusion requires taxpayers to have owned and used the residence as a principal residence for a minimum of five of the eight years before sale. Under prior law, taxpayers were required to use the residence as their primary residence at least two of the last five years before sale. The exclusion can only apply once during any five-year period.

Update: TCJA did not change the IRC Sec. 121 rules applying to residence sales. Taxpayers are still allowed to use the residence as their primary residence at least two of the last five years before sale to be eligible for the exclusion amount.

Alimony

Taxation of alimony has been reversed.  Alimony was formerly an above-the-line deduction for the payor, and included as income for the recipient.  Divorces executed before December 31, 2018, will follow prior law.  Alimony will no longer deductible by the payor, and alimony received will no longer be considered taxable income for the recipient effective for divorces executed December 31, 2018.  

Individual Mandate - Affordable Care Act (ACA)

The individual responsibility payment mandated by the ACA has been permanently repealed after December 31, 2018.  There is no longer a penalty for not obtaining health insurance. 

Inflation Index - Chained CPI

The new tax law uses the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), instead of the Consumer Price Index for All Urban Consumers (CPI-U) to adjust for inflation. This is one of the few provisions applying to individual taxation that is permanent, and it's an important change to note. Chained CPI provides a lower inflation measurement by adjusting for "substitution bias" which accounts for consumers choosing a substitute good available for a lower price.

ChainedCPI

Money Tree's Financial Planning Software:

The new legislation requires significant changes to the tax calculations in the software, which will impact the timeline for the 2018 tax update. The tax changes are the top priority for the software and development is underway.

Silver's big-picture planning keeps taxes simple, and the required changes have been completed and are currently in testing.  The tax update for Silver will be available shortly. 

TOTAL's in-depth planning completes full detailed tax calculations.  The numerous changes required are in development and will require extensive testing.  Planners will be able to choose if the tax provisions will sunset as scheduled after 2025, or be continued as permanent rule changes. The tax update for TOTAL will be available as soon as it accurately reflects the new tax laws.

Notifications will be sent as soon as the updates are available.


Learn More about the Tax Cuts and Jobs Act - Helpful Resources:

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.