February 02, 2018 | News
On January 1, 2018, the most significant overhaul to the Internal Revenue Code in decades took effect. High-income taxpayers stand to benefit from lower tax brackets, higher estate tax exemptions and a less stringent alternative minimum tax. However, high-income earners face new limitations on some favored deductions and notable revisions in charitable write-offs. Some of the most noteworthy changes are outlined below:
The top marginal income tax rate has been lowered from 39.6% to 37% and the income level at which that rate is triggered has been raised. For couples filing jointly, the maximum rate now applies to income topping $600,000, up from $470,700 in 2017. Rates on qualified dividends and long-term capital gains remain the same.
The mortgage interest deduction has been capped at loans of no more than $750,000, although the previous $1 million limit remains in effect for home purchases under contract before December 15, 2017. Interest on home equity loans is no longer deductible.
Among the most significant changes is a $10,000 cap on state and local tax deductions. That is likely to weigh heavily on those in high-tax states such as New York and California, where combined income and property taxes often far exceed that threshold.
The new law retains the controversial alternative minimum tax. But it raises exemption amounts and the income levels at which those exemptions phase out, so fewer families are likely to be ensnared by it.
The law affects charitable giving in several ways. Previous rules capped deductions on cash donations to public charities at 50% of adjusted gross income (AGI). That’s been raised to 60%, but families must itemize to claim specific write-offs. Given that the standard deduction has been raised to $24,000 for married couples filing jointly, some households may not have enough deductions to make itemizing worthwhile.
The much-debated estate tax was not repealed, but taxpayers with substantial assets will benefit from a doubling of the lifetime estate, gift and generation-skipping transfer tax exemptions. Though the top estate tax rate remains 40%, lifetime exemption amounts have been raised to $11.2 million for individuals. Families subject to estate taxes should consider traditional wealth transfer strategies and review existing plans to fully assess the impact of the new law.
Business owners and independent contractors with so-called pass-through income may benefit from the new law. This refers to income that is not taxed at the business level but instead passes through to the owner’s personal income tax return.
Taxpayers may be able to take a 20% deduction from their AGI for qualified business income. In addition, there is no limit on deductions for business-related state and local taxes. The top rate of 37%, combined with the 20% deduction, makes the effective maximum rate on qualified business income 29.6%.
There is increased flexibility for 529 education-savings accounts, which were previously limited to college-related costs but can now be used for K-12 expenses, up to a limit of a $10,000 per year. Rules on tax-deferred retirement accounts, including 401(k)s, individual retirement accounts and SEP-IRAs, remain the same.
While this article sets out some general concepts regarding changes to the tax code, every taxpayer’s situation is unique and must be carefully considered. Contact your accountant or one of our experienced tax attorneys if you wish to discuss your particular situation.