Q. I hear a lot about the new tax law that Congress passed and President Trump just signed, but I am unclear as to how it might affect me and my family. Can you give us a summary?
A. Sure. While much of the new “Tax Cuts and Jobs Act” was designed to reduce the corporate tax rate from 35% to 21%, here are some of the principal features that affect families:
Standard Deduction and Personal Exemption: the standard deduction increases to $12,000 for Individuals, $18,000 for those filing as Head of Household, and $24,000 for Joint filers, all adjusted for inflation. As an apparent trade-off, miscellaneous itemized deductions are eliminated. The Personal Exemptions, which were $4,050 for each member of the household (subject to phase out at higher levels of income), are also eliminated.
Home Mortgage Interest Deduction: the limit on deducting interest on up to $1 million of a home acquisition loan stays in effect for existing mortgages in effect as of December 15, 2017, at least for the next 8 years. However, the interest deduction on mortgages placed thereafter will be subject to a $750,000 limit, which will also become the new cap on existing mortgages beginning January 1, 2026. So, if you have a mortgage above $750,000, it would be wise to try to pay it down over the next 8 years to an amount below the $750,000 cap, so all of your interest payments made thereafter will continue to be deductible. Interest deduction on Home Equity Loans will be eliminated.
Medical Expense Deduction: after much public concern, the medical expense deduction actually survived. In fact, it was temporarily enhanced: for 2017 and 2018, medical expenses above 7.5% of adjusted gross income (“AGI”) will qualify for the deduction. After 2018, only amounts above 10% of AGI will be deductible, as under existing law.
State and Local Tax Deduction: the combined deductibility of the payment of state income taxes and real property taxes will now be capped at $10,000 per person. This will likely have a big impact on residents of California, with its higher income and property taxes, as compared with residents of other states.
Estate and Gift Taxes: the new law more than doubles the existing exemptions, going from $5.49 million per person for those dying in 2017, up to $11.2 million per person for those dying thereafter, and up to $22.4 million for a married couple (where the survivor makes a timely election on her estate tax return). The new rates will be indexed to inflation, just like the current exemptions.
GST Exemption: in 2017, an individual could protect up to $5.49 million from the Generation Skipping Transfer Tax (“GST”), which is a tax assessed when an asset bequest skips over a child and passes directly to a grandchild or the equivalent; the logic of the GST is to make up for the loss of a transfer tax which would otherwise be payable to the IRS when the asset transferred from the parent to the child. Beginning in 2018, that GST Exemption increases to $11.2 million per donor.
Tax Rates: individual tax rates will be reduced and the income brackets adjusted upward, with the top income tax bracket dropping from 39.6% to 37%. Example: under former law, a married couple filing a joint return with taxable income of $140,000 — $250,000 would be taxed at a marginal rate of 36%, while under the new law a married couple with taxable income of $165,000 — $315,000 will be taxed at a marginal rate of only 24%.
Step-Up In Basis: the new law keeps intact the current rule which permits the recipient of property transferred upon the donor’s death to be adjusted to its date of death value as the new ‘cost basis’. This favors property which has increased in value over the donor’s lifetime by reducing the tax on capital gain that would otherwise by payable when the gift recipient later sells the property.
Individual Mandate Eliminated: the new law eliminates the tax penalty for failure to maintain “minimum essential” health care coverage, which many believe will significantly weaken the Affordable Care Act signed into law by President Obama.
Spousal Support Payments No Longer Deductible. For divorce decrees or support orders made after 12/31/2018, spousal support payments will no longer be deductible.
California State Income Tax: Unless California adopts confirming legislation, it will retain existing law for state income tax, and many persons will therefore be obliged to calculate their state and federal taxes using two separate frameworks of deductions.
Special Concern: Of special concern for seniors and the disabled, is that these tax cuts will add up to $1.5 trillion to the deficit over 10 years, and may then be cited as “justification” for reductions to Medicare, Medicaid, Social Security, or other programs, to pay for the resulting deficit.
Special Note: Except for the corporate tax rate cut, almost all of the new features ‘sunset’ at the end of year 2025, with the changes reverting back to their current form in 2026 unless Congress acts to extend them. This reversion back creates uncertainty for tax planners, especially in regard to estate planning. In this respect, Congress expressly deferred to the Secretary of the Treasury to issue “appropriate” regulations to address this concern. [See § 11061 of the Act by scrolling to page 38 using the link of the full text of the Act, below.] Our hope is that the Secretary will issue regulations which provide that the increased estate tax exemption amounts which were in effect when estate plans were signed will control the exemption amount at death, even if death occurs after the Act sunsets. However, we must await regulations in this regard.
For more on the new law, see the companion article on this website, “How Will The New Tax Law Impact Seniors and Persons With Disabilities?”
References: (1) Click this link for the full text of the Tax Cuts and Jobs Act (H.R.1) Signed into law by President Trump on 12/22/2017. (2) See, IRS News regarding effect of inflation on some tax benefits and deductions for the year 2017, an IRS release which preceded the signing of the new law. (3) Article by Kathleen Pender in San Francisco Chronicle of January 7, 2018, “How the Federal Tax Overhaul Will (or Won’t) Affect Your State Income Taxes“.