Tag: tax reform

Personal Wealth Opportunities Under the New Tax Laws: A Canon Capital Wealth Management Financial Literacy Seminar

Many are wondering how the new tax laws will affect them in the short and long-term. Our Wealth Management unit dedicated the first Financial Literacy seminar of the year to the topic, with our managing director of Wealth Management, Dr. Peter Roland, providing an overview of what to expect and how best to prepare.

In addition to the overview we’ll present in this blog post, you may view the full webinar here. You may download the presentation to follow along, take notes, and note any questions.

The official name for the bill that passed in December 2017 is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Not very catchy, Congress has dubbed it the “Tax Cuts and Jobs Act.” No matter the name, what this bill was designed to do is lower general tax rates, while also making changes to the deductions and exemptions many have grown accustomed to. With that, this bill creates “winners,” “losers,” and considerations and opportunities for both short and long-term wealth management.

Changes in Tax Rates and Deductions/Exemptions

With this new plan, individual tax rates have dropped, meaning many are seeing more money in their paychecks. At the same time, the standard deduction amounts have nearly doubled. However, this can lead to an issue at tax time for taxpayers with large itemized deductions and personal exemptions. Their tax liability may go up even though the rate at which they are being taxed is lower. To make sure you’re not headed for a surprise when your 2018 taxes are being prepared, do what we call a “Paycheck Check-up”. Use the withholding calculator provided by the IRS to make sure enough money is being withheld from your pay.

Among the changes in itemized deductions in the Tax Cuts and Jobs Act:

  • Medical expenses for 2018 and 2019 are now deductible in excess of 7.5% of adjusted gross income (AGI). Before it was in excess of 10% of your AGI.
  • Deduction for State, Local, and Real Estate taxes (SALT) is limited to $10,000.
  • Deduction for Mortgage Interest Qualified Acquisition Debt reduced from $1,000,000 to $750,000 for first or one second home.
  • Home Equity Loans other than the amount used to acquire or improve the home are no longer deductible.
  • Charitable contributions can now offset 60% of AGI (was 50%).
  • Casualty losses eliminated except for federally-declared disaster areas.
  • Miscellaneous Itemized Deductions eliminated (unreimbursed employee business expenses, investment fees, tax prep fees).
  • Personal Exemptions have been eliminated (was $4,050 per Exemption in 2017).
  • Higher exemptions for Alternative Minimum Tax.
  • Alimony is not taxable by recipient (or deductible by payor) for new agreements after 12/31/2018.
  • Homeowners gain exclusion ($250,000/$500,000) now requires that the homeowner must live in the residence five of the prior eight years as opposed to two of the prior five years.

This new law has also affected credits and deductions related to child care and college savings:

  • Child Care Credit increased from $1,000 to $2,000.
  • Section 529 Education Plans allowed to distribute up to $10,000 for elementary, secondary, and certain home school expenses.
  • Investment income of child now taxed at higher trust tax rates vs. individual tax rates.

Estate & Gift Taxation as changed as follows:

  • Federal exemption of estate tax is now $11.2 million per person (to be adjusted for inflation).
  • Higher Annual Gift Tax exemption amount of $15,000 (raised from $14,000).

Business owners will see a reduction in tax rates as well:

  • Regular “C” Corporation: highest tax rate reduced from 35% to 21%
  • Higher Section 179 depreciation deduction limits
  • New deductions for 20% of qualified business net income from passthrough entities (S Corporations, Partnerships, LLC’s, Sole Proprietorships).
  • Income limits for 20% benefit – $157,500 and $315,000 taxpayer income.
  • 20% deduction of income from REIT dividends, Master Limited Partnership dividends, and Co-ops.
  • Real Estate now counts as a qualified business.

Truc Alert

A “Truc” is not some advanced financial term. It’s the word our local Pennsylvania Dutch use for “trick.” Under this new tax law, even though for many the tax rate will go down, the amount of tax owed will increase. In addition:

  • These reduced tax rates and standard deduction changes for individuals will sunset, aka disappear, in 2025.
  • Those beneficial provisions will be disappearing on a now-expanded income base.
  • The new IRS inflation factor calculation for brackets modified are now using “Chained CPI,” resulting in higher taxes over time as a result of “taxflation.”

Strategies

How can you make the best of the advantages and disadvantages of this new tax law? In addition to the “Paycheck Check-up” we recommended earlier, you might also consider:

  • Take advantage of “Tax Arbitrage” when possible.
  • Use donor-advised funds to “bunch” charitable contributions, using appreciated assets when possible.
  • Look at your “bucket list,” the funds you choose to be taxed now, taxed later, and never taxed (i.e., Roth IRA).
  • Review Roth IRA opportunities
  • Consider real estate investments to enjoy the 20% deduction of net income from investment real estate activity. This is especially key as many will opt to rent over buying a home with the loss of the itemized deduction benefit.
  • Evaluate your personal debt and consider paying off non-deductible home equity loans more quickly that are no longer subject to interest deductibility.
  • Plan for and use the 20% deduction against “Qualified Business Income” and evaluate your business structure for new rules.
  • Make optimal use of “portability” election in estates to maximize the exemption available to surviving spouse, not forgetting about step up in tax basis for assets flowing through estates. Also consider State inheritance taxes in your planning.

We’ve included a lot of information in this blog post. Take about 45 minutes of your time, watch the webinar, and please let us know if we can help with any questions you might have regarding this or any other financial services matter. Contact us online or call 215-723-4881.

Prepay Your Property Taxes? It Depends

You’ve probably seen or heard news reports about prepaying 2018 state and local real estate taxes in reaction to the recently-passed Tax Cuts and Jobs Act.

With this new legislation, beginning in 2018, taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes. The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

So, can you prepay your 2018 real estate taxes in 2017? Yes, and no. If you live in Montgomery or Bucks counties in Pennsylvania, the answer is “No.” Montgomery County has posted the following statement on their website:

The county has received a number of inquiries from individuals seeking to prepay their 2018 county real estate taxes. While the county understands and supports these efforts, Montgomery County is not permitted under Pennsylvania Law to accept such prepayments. Unlike Philadelphia, Delaware, and Allegheny counties, which are governed by Home Rule charters and thus permitted to allow the prepayment of taxes, Montgomery County, as well as Bucks, Chester, and other counties which are not Home Rule, must work within the confines of the tax collection requirements imposed by the Commonwealth. As these requirements explicitly prohibit the prepayment of real estate taxes, Montgomery County is prohibited from accepting 2018 real estate taxes until after the first of the year.

If you pay property taxes in a region where prepayment is permitted, you may only do so if you’ve received your 2018 tax assessment, as this article from Yahoo Finance explains:

But many residents trying to avoid that deduction limit on their state and local taxes will be disappointed: the IRS on Wednesday announced that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.

As always, we are here to help. If you have any questions, or would like to discuss your tax plan for 2018, please contact us online or call 215-723-4881.

The Tax Cuts and Jobs Act Has Passed: What You Need to Know

The Tax Cuts & Jobs Act Bill (H.R. 1) has now passed the House and Senate and is on its way to the White House for the President’s signature to become law.

Here is a summary of some of the major provisions that will affect both Individuals and Businesses after this Bill becomes law. Most changes will be effective January 1, 2018; however, there are certain specific changes which will take effect before 2018.

Changes for Individuals

Individual Rates: The top individual rate will be 37 percent for individuals earning $500,000 and above and joint filers earning at least $600,000. There will be seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent. The tax bill will nearly double the standard deduction, increasing it to $24,000 for a couple filing jointly and to $12,000 for single taxpayers. The tax rates and standard deduction expansion will expire in 2026.

Mortgage Interest Deduction: The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

State and Local Tax Deduction: Taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes.

Child Tax Credit: The child tax credit will be increased to $2,000 from the current $1,000 per child credit, with up to $1,400 of it being refundable.

Medical Expense Deduction: The bill will allow taxpayers to deduct medical expenses exceeding 7.5 percent of adjusted gross income for 2017 and 2018.

Individual Mandate: The plan would zero out the penalties for not obtaining health coverage for individuals and families.

529 College Accounts: 529 Accounts can now be used for elementary, secondary, and higher education.

Individual Alternative Minimum Tax: The individual AMT will increase to apply to individual filers earning more than $500,000 or joint filers earning $1 million or more.

Changes for Businesses

Corporate Rate: The corporate rate will be reduced to 21 percent starting January 1, 2018.

Pass-through Taxation: Pass-through entity owners that meet certain conditions will be eligible for a 20 percent deduction on their business income.

Business Expensing: Full expensing of new and used capital investments will be permitted for five years. After 2022, the 100 percent allowance will be phased down by 20 percent each year. Section 179 expensing, which doubles the amount eligible for the special small business investment write-offs, will also be made permanent.

Corporate Alternative Minimum Tax: The corporate AMT will be repealed.

Other Changes

Estate Tax: The exemption is doubled for estates worth approximately $11 million for individuals and $22 million for couples. The exemptions will revert to current levels after 2025.

International Business: Eliminates incentives that now reward companies for shifting jobs, profits, and manufacturing plants abroad. These incentives will prevent American jobs, headquarters, and research from moving overseas.

For even more information, here is a summary of the policy highlights as provided by the Joint House and Senate Conference Committee for your review.

If you have any questions about how this tax bill will affect your specific tax situation, please contact us online or call 215-723-4881 to set up a time to review the effects of these changes with you.

Disclaimer: This communication contains general tax information and should not be construed as specific tax advice for your situation.

 

Tax Reform Update: Year-end Moves

As you might be aware, tax reform bills have passed in both the House and Senate.  Both of these bills have some differences and are currently in the process called “reconciliation” to bring one bill to the President for his signature. We will have to wait and see what the final bill includes, but as 2017 is coming to a close rather quickly, there are some year-end “moves” you might want to consider in anticipation of the coming changes for 2018.  Most items included in a new tax law will be effective January 1 of 2018, so this year-end’s planning becomes important to obtain the maximum tax benefits.  Otherwise, certain deductions may be lost forever.

Here are some planning points for you to consider in light of the anticipated tax law changes:

State and Local Taxes

Currently, real estate taxes are deductible for all property owned by a taxpayer, and all state and local income taxes are deductible.

Under the House and Senate plans, there would be a cap of $10,000 for state and local property taxes  ($5,000 for married taxpayers filing separately). The deduction for state and local income taxes potentially might be eliminated altogether.

Therefore, if you are an itemizer, you may want to pay your property tax payments for 2018 ahead of time to include the deduction in your 2017 return. You may also want to consider paying any state and local estimated income taxes in 2017, since the deduction may be lost if you wait until 2018.

Charitable Donations

Since the tax bills are both doubling the standard deduction for all taxpayers (married filing joint to $24,000 and single to $12,000), many taxpayers will no longer be able to itemize deductions, but will instead just take the increased standard deductions.   As a result, this may be the last year many taxpayers obtain a tax benefit for charitable contributions.

Therefore, you may want to consider accelerating any planned donations from 2018 into 2017.  This will also make the ability for taxpayers who are taking required minimum distributions from IRA’s to make their charitable contributions directly from an IRA account.

Mortgage Interest and Home Equity Loans

Currently, mortgage interest is deductible for mortgages on a first or second home. The acquisition debt – that is, mortgages obtained to acquire the property – is capped at $1M and home equity indebtedness – defined as debt secured by the home in excess of acquisition debt – is capped at $100K.

The House plan would reduce the mortgage interest deduction limitation to $500K of debt and limit it to the taxpayer’s primary residence only. It would eliminate the interest deduction on home equity indebtedness altogether.

The Senate plan would keep the limitation of $1M on acquisition debt, but would also limit the deduction on home equity indebtedness.

Therefore, you may want to consider paying down any loans where the interest deduction would be eliminated next year.

Medical Expenses

Currently, medical expenses in excess of 10% of adjusted gross income (7.5% for ages 65 or older) are deductible as an itemized deduction.

Under the House Bill, medical expense deductions would be eliminated. Under the Senate Bill, the deduction is preserved, and the threshold is reduced to 7.5% of adjusted gross income for 2018.

Between the potential for the elimination of the deduction altogether and the increase in the standard deduction, if you currently are near or are close to the 10% limit for 2017, you may want to consider accelerating payments for medical expenses prior to year-end. You may also want to consider scheduling any elective procedures before year-end for you or your dependents.

Other Items to Consider

You will still have the usual decisions to delay or accelerate income and expenses – such as increasing or decreasing 401k or retirement plan contributions, Health Savings Accounts, etc. Investment and capital gain planning will take on a new wrinkle as both bills will now require the use of the FIFO method, instead of the taxpayer having options of methods to recognize gains. If you’re in business, should you buy new assets this year by December 31 when the tax rates are higher, or wait until the rates potentially drop next year?

Both the House and Senate Bills are extremely comprehensive and touch on many other areas, including Alternative Minimum Tax, elimination of other itemized deductions, Alimony, Child Tax Credits, Education Credits, and so on.

Of course, we cannot touch on all topics and scenarios here.  Therefore, we would encourage you to reach out to us with any specific questions you may have on your own situation.  As these two Bills are reconciled and potentially become law, we will continue to keep you informed. Please contact us with any questions. We are happy to be of service.