Four Tax Law Changes that Could Affect You
posted Feb 12, 2018 by Dave Desmarais, CPA/PFS, MST, MBA, AEP® in the Global Tax Blog
Thanks to the new tax law, most people are expected to pay less tax, starting in 2018. The tax cuts should last through 2025, when many of the individual provisions of the new law are scheduled to expire.
The effects of the new tax law will vary, however, depending on your personal situation. Here’s an overview of four new (or modified) provisions of the Tax Cuts and Jobs Act that are likely to affect upper-income individuals.
1. Revisions to the Alternative Minimum Tax (AMT)
Although GOP lawmakers had hoped to repeal the AMT in its entirety, they succeeded in eliminating the AMT only for corporations. Individuals are still subject to the AMT, but the new law significantly increases the AMT exemption amounts, as well as the phase-out thresholds.
For example, the AMT exemption for 2018 is $109,400 for a married couple that files jointly (compared to $86,200 for 2018 under prior law). The AMT exemption starts to be phased out for married-joint filers with income of $1 million for 2018 (compared to $164,100 for 2018 under prior law). These amounts are indexed annually for inflation. (Different expanded exemption amounts and phase-out thresholds apply to single and married-filing-separately taxpayers.)
The bottom line? Fewer individual taxpayers will be hit with the AMT, starting in 2018. And, those that still owe AMT will probably owe less in AMT through 2025 than they would have under the old rules.
2. Modified State and Local Taxes (SALT) Deduction
The new tax law limits itemized deductions for state and local income (or sales) taxes and property taxes combined to $10,000 annually ($5,000 for married taxpayers filing separately) from 2018 through 2025. This change has received a lot of attention in the Northeast, where state tax rates tend to be fairly high compared to the national average.
The SALT limitation — along with restrictions on the deductions for home mortgage interest, the elimination of miscellaneous itemized deductions and increases in the standard deduction — could cause fewer upper income taxpayers to itemize deductions from 2018 through 2025.
However, some states are discussing possible workarounds to offset the federal limit on SALT deductions. For example, legislators in New York are discussing the possibility of reducing state income taxes but making up that revenue with employer payroll taxes. The payroll taxes would remain deductible for the employer under the new law, while providing employees with a state income tax credit equivalent to the payroll tax increase.
New York’s plan would, in theory, leave employees’ net income after state taxes unchanged. However, it would essentially extend federal deductibility of state taxes to all workers, not just to those who itemize their deductions, including out-of-state workers who commute to New York.
This workaround is a work in process. If it’s enacted, other states could follow suit. But the IRS is expected to challenge this plan, arguing that an employer-side payroll tax, paired with a full tax credit, qualifies as a payment by an employer of an employee’s income taxes. This interpretation would negate the benefit and possibly increase the employee’s tax liability.
3. Expanded Child Tax Credit
Historically, the child tax credit was available only to lower and middle income families. But the new tax law increases the phase-out threshold for this break from $75,000 to $200,000 for individuals and from $110,000 to $400,000 for married taxpayers who file jointly. The threshold for married individuals filing separately increased from $55,000 to $200,000.
As a result, more upper income households will qualify for the child tax credit, which equals $2,000 for 2018 (up from $1,000 in 2017) for each qualifying child under age 17. This helps offset the elimination of the dependency exemption deduction (which was $4,050 per child for 2017). As a general rule, credits are more valuable than deductible items, because credits reduce taxes dollar for dollar. Deductions only lower taxable income.
However, children are ineligible for this credit starting in the year they turn 17. (Under prior law, the dependency exemption applied to young people up to age 24 if they were full-time students.) Under the new law, kids over 17 may qualify for a reduced credit of $500 for non-child dependents, as well as education credits if they’re full-time college students.
4. Increased Gift and Estate Tax Exemption
The new law doubles the gift and estate tax exemption from $5 million under prior law to $10 million for estates of decedents dying and gifts made from 2018 through 2025. These amounts are adjusted annually for inflation in years after 2011.
Under prior law, the exclusion amount would have been $5.6 million ($11.2 million for a married couple) for 2018. Under the new law, the inflation-adjusted exemption is $11.2 million ($22.4 million per married couple) for 2018.
These changes will significantly lower federal gift and estate tax obligations, especially for family-owned businesses. However, state death taxes may still apply in many parts of New England, including Connecticut, Maine, Massachusetts, New Jersey, New York, Rhode Island and Vermont. And the expanded federal gift and estate tax exemption is scheduled to expire in 2026, unless Congress takes further action. So, it’s important to continue to evaluate your estate planning options, despite the favorable changes under the new law.
How will the new tax law affect you? Our tax professionals can help you answer this question by providing an in-depth analysis of your specific situation. Contact us for more information.