Congress passed the Tax Cuts and Jobs Act in December of 2017 which is aimed at cutting taxes for corporations and all Americans. While the bulk of the legislation went into effect January 2018, most taxpayers will not see much of a difference in their taxes until 2019 when they file their 2018 taxes.
Before explaining the changes, here are several items that will remain the same. The new tax bill keeps the extra standard deduction for those 65 and older, which is $1,250 for individuals, $1,550 for heads of households, and $2,500 for couples who are both age 65 or older. The new plan also keeps the popular medical expense deduction. This deduction allows people to deduct medical expenses that exceed 7.5 percent of their income for the 2017 and 2018 tax year. In 2019 this will increase to bills that exceed 10 percent of their income. Plus the bill retains the deductions for 529 plans, IRAs, 401(k)s, and Health Savings Accounts (HSAs), offering you several opportunities to reduce your taxes while building financial security for the future if you choose to save and invest some of the tax savings. Further, the new plan does not affect the way Social Security or investment income is taxed. The bill provides no reduction in personal capital gains rates (which remain 20% for most assets and taxpayers) and no repeal of the 3.8% net investment income tax.
In order to simplify the tax code and save you some time at tax time, some above-the-line deductions (moving expenses and alimony) were eliminated and the standard deduction was increased to $12,000 for individuals, $18,000 for heads of households, and $24,000 for married couples filing jointly.
The estate, gift, and generation-skipping transfer (GST) tax exemptions were doubled to $10 million per person ($20 million per couple) which opens a significant, once-in-a-lifetime opportunity for you to protect more assets than ever. Tax reform opens the door for dynasty trusts, family partnerships, discounted gifts, and other strategies that could shield entire fortunes for your beneficiaries. Although the estate tax and GST tax exemption doubled on January 1, 2018 to $10 million per person, this increased exemption expires on December 31, 2025.
Perhaps the most talked about change in the new tax plan is the repeal of the individual mandate contained in the Affordable Care Act. According to the bipartisan Congressional Budget Office (CBO), by 2027 this will increase the number of Americans without health insurance by 13 million. The CBO also states that because there will be a smaller pool of insured, it expects insurance premiums in the individual market to increase by 10 percent over the next 10 years. Citizens age 50 to 64 can expect a premium increase of up to $1,500 in 2019.
Other notable provisions that will affect individuals include the new tax brackets which range from 10 percent for the lowest earners to 37 percent for those with the highest incomes. Taxpayers can still deduct state and local taxes, which may include income, sales, and property taxes, but the deductions are now capped at $10,000. The charitable giving deduction will increase under the new plan until this provision expires in 2026. The mortgage interest deduction is also being updated. Now the deduction on mortgage interest is capped to loans of $750,000 for new home purchases, and interest accrued on home equity loans is no longer deductible.
The tax bill slashes taxes across the board, contributing to a loss of $1.5 trillion in revenue to the government over the next decade. This deficit would trigger cuts to “pay-as-you-go” programs such as Medicare and Medicaid. Medicare is expected to have its budget slashed by $25 billion in 2018.
Under the new Tax Cuts and Jobs Act, the majority of Americans may see their tax bills decrease. However, it is still prudent to be aware of the changes that may affect your health care premiums or deductions on medical expenses. Now is a great time to review your estate plan to make sure your plan achieves your overall planning goals and takes advantage of the new tax-saving opportunities under tax reform.