On December 22, 2017 President Trump signed the “Tax Cuts and Jobs Act of 2017” into law. This new tax law made various changes to estate tax and income tax. How will the Trump Tax Reform Affect You?
First, local Bloomington CPA, Chad Rogers gives an overview of how the Trump Tax Reform effected personal income tax law. Chad Rogers is a CPA and Partner at Streigel Knobloch & Company, L.L.C. in Bloomington, Illinois. He concentrates his practice on income tax planning and tax preparation. More information about Chad Rogers can be found by Clicking Here.
Next, Chad Ritchie gives an overview of how the Trump Tax Reform effected estate tax planning. Chad Ritchie is an attorney that concentrates his practice is estate planning, business law and commercial real estate. Chad Ritchie is the founder and principal shareholder of the Ritchie Law Office, Ltd. in Bloomington, Illinois. More information about Chad Ritchie can be found by Clicking Here.
Trump Tax Reform – Income Tax Planning
By Chad E. Rogers, CPA, Streigel Knobloch & Company, L.L.C.
The Tax Reform Act recently passed by Congress significantly changes the landscape for individuals beginning January 1, 2018, and continuing for many years to come. For many taxpayers, the changes made by the Act present a host of tax planning challenges and opportunities going forward. Due to the give and take of the Act, it is important to take a look at your entire situation before you begin planning for 2018. There is definitely not a one-size-fits-all approach as to how the Act affects you, so you need to consider various different factors before you decide what strategy is best for your personal situation. You should always consider maximizing all pre-tax contribution opportunities such as your 401(k), deductible IRA contributions, as well as HSA contributions.
Highlighted below are some of the more significant changes made by the Tax Reform Act and possible challenges and opportunities to lower your tax bill for 2018 and beyond.
Lower Individual Tax Rates - The Act creates lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. The current rates will be restored in 2026, i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively.
Modification of the Alternative Minimum Tax (AMT) - The Act retains the AMT for individuals but increases the exemption amount and phase-out thresholds so fewer people will pay it. From 2018 through 2025, a higher AMT exemption will apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will phase out at $1 million for joint filers and $500,000 for other taxpayers. The thresholds will be adjusted for inflation.
Increase in the Standard Deduction - Beginning in 2018, the standard deduction increases significantly from $12,700 to $24,000 for joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for singles. Since you can claim the higher of the standard deduction or itemized deductions, you will want to closely compare the two methods as you may now benefit from a higher standard deduction given the many changes to itemized deductions.
Elimination of Personal Exemptions - In exchange for lower tax rates and increase in the standard deduction, personal exemptions no longer may be claimed beginning in 2018.
Child and Dependent Credits - From 2018 through 2025, the Act increases the value of the child tax credit to $2,000 per child under 17 from $1,000. As much as $1,400 of the credit will be refundable, thus allowing recipients to benefit even if they don't owe tax. The refundable portion of the credit will be indexed for inflation. The legislation also expands eligibility for the credit by increasing the phase-out threshold to $400,000 of adjusted gross income for joint filers (up from $110,000 under current law), with a threshold for all other filers set at $200,000. A $500 non-refundable credit for dependents other than children will be available through 2025.
$10,000 Cap on State and Local Tax Deduction - The Act will allow individuals to deduct no more than $10,000 of any combination of the following taxes - state and local income taxes, state and local property taxes, and sales tax. This overall limitation may result in the enhanced standard deduction yielding a larger deduction against your adjusted gross income and thus a lower tax bill.
Limits on Mortgage Interest Deduction - The Act reduces the amount of mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages incurred after December 15, 2017. The $1 million limitation remains for previously existing debt. Interest on your principal residence and a second home are deductible. Importantly, however, beginning in 2018, interest on home equity indebtedness no longer is deductible, regardless of when it was incurred. You may want to consider refinancing your home equity line into a single mortgage on your principal or second home in 2018 assuming that your combined mortgage interest and other permitted itemized deductions exceeds the standard deduction.
Medical Expense Deduction - Individuals may deduct medical expenses in 2018 and 2019 if the expenses exceed 7.5% of adjusted gross income. The threshold returns to 10% of adjusted gross income in 2019. Again, you will need to review whether claiming such expenses, when combined with other allowable itemized deductions, yields a higher deduction than the standard deduction.
Elimination of Deduction for Unreimbursed Employee Business Expenses - The Act eliminates the deduction for miscellaneous itemized deductions through 2025. Thus deductions for costs related to the production or collection of income, such as appraisal fees, investment fees, and safety deposit box rent are now nondeductible, and expenses related to employment, such as uniforms, professional society dues, computer used for work, and job-hunting expenses also are nondeductible. Employees who incur significant unreimbursed business expenses may want to ask their employer about adjusting their compensation or establish an accountable expense reimbursement plan that would allow the employer to reimburse the employee tax-free while also entitling them to a deduction against their business income.
Alimony Deduction - The Act repeals the deduction for alimony paid for divorces or separations executed after December 31, 2018. After that date, alimony payments will not be included in the recipient's income and the payments no longer will be deductible. If you are currently contemplating divorce or separation, a careful review of the effects of the new law should be undertaken to determine the economic affects on your tax situation and timing of any agreements.
Trump Tax Reform – Estate Tax Planning
By: Chad A. Ritchie, Ritchie Law Office, Ltd.
From an estate planning standpoint the Trump Tax Reform won’t affect too many people. The main change is that the new law doubled the Federal Estate Tax Credit and Federal Gift Tax Credit from $5.49 Million to $11.2 Million.
What is the Federal Estate Tax Credit? Here is a simple explanation of how the Federal Estate Tax Credit works: Your estate can have a net worth of so much money before the Federal Government will impose a tax on your estate when you die. In 2017 this amount was $5.49 Million dollars. The Trump Tax Reform increased that tax credit to about $11.2 Million dollars. All of the assets that you own at your death – including life insurance, retirement accounts and the equity you have in your home all count towards the value of your estate. Very few people needed to worry about estate tax when the exemption amount was $5.49 -- now even less people will need to worry about it now that it is $11.2 Million.
Remember – there still is an Illinois Estate Tax. Illinois has an estate tax of its own that is separate from the Federal Estate Tax. The Trump Tax Reform only effected the Federal Estate tax – it did not affect the Illinois estate tax. Illinois has an estate tax credit of $4 Million. Therefore even though the Federal Estate tax is $11.2 Million – those people with estates approaching $4 Million dollars will still need to think about estate tax planning for Illinois estate tax purposes.
What is the Federal Gift Tax Credit? You have a lifetime Federal Gift Tax Credit where you can give people money and you won’t be taxed on that gift. The lifetime gift tax credit is tied to the Federal Estate tax credit. Now the lifetime Federal Gift Tax Credit is $11.2 Million instead of $5.49 Million. This means you can now give up to $11.2 Million dollars away during your lifetime without having to pay any tax on it. In addition to the $11.2 Million lifetime gift tax credit – there is a $15,000 annual gift exclusion amount. This means that you can give a person up to $15,000 a year without having to report it to the Federal government. If you give more than $15,000 a year you have to file an annual gift tax return to report that gift to the IRS.(Note – you have to report the gift – but not necessarily pay tax on that gift). The amount that is reported is then deducted from your $11.2 lifetime credit. When you die your estate tax exemption is lowered by any gifts that your reported during your lifetime.
Bottom Line: The Trump Tax Reform helped people with estates over $5.49 Million the most. Prior to the Trump Tax Reform only about 3 in 1000 people needed to file an estate tax return upon their death. Now that that Federal Estate Tax and Gift Tax Credits have been doubled to $11.2 million – even less people will need to worry about federal estate tax. However, the Illinois estate tax remains unchanged – and therefore – if your estate is approaching $4 Million you still need to think about strategies to avoid the Illinois estate tax.
This article is a service of Attorney Chad A. Ritchie and the Ritchie Law Office, Ltd. Click Here or call (309) 662-7000 to learn more about what it’s like to meet with the Ritchie Law Office, Ltd. for your initial estate planning meeting. We call this initial Estate Planning meeting a “Ritchie Legacy Planning Session”.
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