The Tax Cuts and Jobs Act, finalized on December 15th, 2017, affects countless individuals and industries in ways that everyone is scrambling to decode. From real estate to income tax, individual deductions to how businesses will function in the future, it can be hard to understand what this truly means for you.
Below is a quick summary of how the TCJA might affect you in 2018:
Executive Summary
Income tax brackets
- Seven total brackets.
- Top bracket down from 39.6% to 37%.
- Most brackets have been trimmed slightly.
- Subject to sunset.
- Effective January 1st 2018.
Alimony
- No change for 2018.
- For agreements entered into on 1/1/19 or later, alimony is NOT tax deductible for the payor and the recipient will not be taxed.
Capital gains and dividend rates
- Unchanged from current law.
Standard deduction
- Increased from $6,350 to $12,000 for single filer.
- Increased $9,350 to $18,000 for head of household
- Increased $12,700 to $24,000 for Married filing jointly.
- Effective January 1, 2018.
Suspension of personal exemption
- Will require change to standard practice of claiming withholdings on W-4 for all employees.
- There is no guidance yet on how this will be done.
- Effective 1/1/2018.
Phaseout for Child Tax Credits
- This increased dramatically. This will affect support calculations by allowing more high-income individuals to take advantage of the credits.
- The phaseout is increased from $75,000 to $200,000 for individuals.
- These are valuable credits as they work as a dollar for dollar offset against taxation rather than a deduction from income.
$10,000 cap on state and local income and property tax deductions.
- This is a combined total.
- This provision, we believe, will affect our clients drastically: Consider the average California family with a $1,000,000 home and $10,000 property tax bill that comes along with it. The property tax alone will eat up the entire deduction. Now, assume that family earns $400,000 per year with two wage earners. Their combined state income taxes easily exceed $30,000 which will no longer be deductible on their federal return.
Mortgage interest deduction
- Limited to $750,000 loan effective for all purchases going forward.
- All homes purchased before 12/15/2017 grandfathered to $1,000,000.
- Home equity interest is not deductible and no grandfathering.
Repeal of miscellaneous itemized deductions
- Under current law, it is possible for a client to deduct a portion of their legal fees during divorce as miscellaneous itemized deductions; specifically, those legal fees incurred in seeking or defending oneself from alimony. In highly litigated high-income cases this number can rise to six figures and provide much needed tax benefits during dissolution. The new law suspends all miscellaneous itemized deductions.
Bill does not amend or repeal Capital Gains exemption for principal residence despite revisions proposed.
- Both houses had included repeal or phase out of exemption but did not end up in final bill.
Doubled the estate tax exemption
- $11,200,000 for singles.
- $22,400,000 for married couples.
Many of the reforms sunset in 2025.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.
Lou Falvo is a Certified Divorce Financial Analyst® and CIMA® (Certified Investment Management Analyst) who assists clients by evaluating the tax and financial aspects of divorce. Lou is dedicated to reducing the burden of each client by thoroughly examining the financial elements of the client’s divorce, with a keen focus on what is in his or her best interests. Contact Lou to find out how he can assist you with your divorce proceedings at lfalvo@crossroadsdivorce.com or (585) 542-2382.