By Kevin Theissen
Tax Cuts and Jobs Act
The nature and shape of the nation’s tax system inevitably influences the everyday decisions made by individuals and businesses alike. After the implementation of one of the most comprehensive reforms in over a generation, it is essential to review certain financial and investment strategies.
For millions of Americans and businesses it means an altered financial and investment landscape with new opportunities and challenges in the years ahead. Keep in mind, however, that the information in this material is not intended as tax advice and may not be used for the purpose of avoiding any federal tax penalties.
Business takes center stage
Businesses may begin benefiting from a number of changes, including:
Reduction in the top tax bracket from 35 percent to 21 percent;
Full and immediate expensing of capital investments (phased out after five years);
Implementation of a territorial tax system that taxes only income earned within the U.S.;
Special one-time tax on repatriation of foreign earnings;
Repeal of corporate Alternative Minimum Tax; and
A 20 percent deduction of qualified business income from certain pass-through entities. Service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers.
Business owners should consider meeting with a tax professional to understand the impact of these changes on employee benefits, business investment, and corporate structure.
The changes in tax law may affect companies differently, which could shift where future investment opportunities may be found.
For instance, the lower tax rate may be more meaningful to higher-taxed industries, which can include certain retail, healthcare and telecom firms. Real estate investment trust companies also may benefit from the new pass-through deductions and exclusion from the new limit on interest deductibility of 30 percent of net income.
Conversely, with the changes made to individual taxation (see below), there may be a negative impact on home builders and real estate sales agents, while highly leveraged businesses potentially may burdened by the new cap on interest deductibility.
Overall, the tax cut is projected to increase corporate profits, with many Wall Street analysts lifting their 2018 earnings forecasts anywhere from seven to 10 percent. This may not only justify current stock valuations, but may influence prices going forward.
Past performance does not guarantee future results. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
Changes for individuals
The Tax Policy Center projects that taxes will fall for all income groups and result in an increase of 2.2 percent in after-tax income. The Tax Policy Center also cautions, however, that some individuals and households may see a higher tax bill.
Highlighted below are some of the major changes:
Reduction in most marginal income tax brackets;
Near doubling of the standard deduction;
Elimination of personal exemption;
A $10,000 cap on the state and local tax deduction;
An increase in the child tax credit and the expansion of eligible families
Mortgage interest deductibility limited to mortgages up to $750,000 (reduced from $1 million)
Medical expenses deductibility will kick in at 7.5 percent of income, down from 10 percent
529 plans may now be used to fund elementary and secondary education
Alternative Minimum Tax is curtailed;
401(k) borrowers will have more time to repay plan loans when leaving an employer
Elimination of the ability to “undo” a Roth conversion.
These tax changes may have wide ranging impact on the financial choices you make. For example, you may want to consider the best use for your additional after-tax income.
The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. As such, individuals benefiting from this change may want to re-evaluate the strategies they have in place to address the tax and liquidity issues that may no longer exist.
Kevin Theissen is the owner of Skygate Financial Group in Ludlow.