Morningstar Magazine - February/March 2018 - 42

Strategies

Tackling the New Tax Law in 2018
Although much has changed,
"tried and true" planning strategies
can still be beneficial.

TAX WISE

Sheryl Rowling

Our Christmas "gift" from the Republican
Congress and administration came in the form
of a rushed, complex, far-reaching tax
overhaul: The Tax Cuts and Jobs Act. There were
numerous articles describing tax-savings
moves to make before Dec. 31, 2017, but it's now
2018. Many analysts provided illustrations
of how the new rules will increase a typical
individual's tax liability, while others were certain
that the law will decrease the average
taxpayer's tax hit.
Speculation about how the law will affect
Americans in general has little to do
with ramifications to any particular taxpayer.
With that in mind, I will begin with a
brief overview of the new provisions, followed
by recommendations on what to do.
The Basics

The law slashes corporate tax rates and cuts
individual tax rates-especially for highincome taxpayers. The corporate reductions are
permanent, while the individual tax cuts
expire after 2025. Over the next decade, these
provisions are expected to add about $1.5 trillion
to the U.S. deficit.
Reductions for Individuals
3 Tax rates lowered to a maximum of 37% from
a maximum of 39.6%. Material reductions
don't occur until income levels are over $75,000
for singles and $150,000 for married couples.

42

Morningstar February/March 2018

3 The standard deduction doubles to $12,000 for
singles and $24,000 for married couples. This
means that fewer people will itemize deductions.
3 Deduction of medical expenses over 7.5%
of adjusted gross income now allowed, down from
10%. This is not a deduction you want to qualify
to take!
3 Exemptions from the Alternative Minimum Tax
increased. Fewer high-income people will
be subject to the AMT, and if subject to the AMT,
they will pay less.
3 Child credits double to $2,000, the refundable
portion increases to $1,400, and a $500
credit for nonchild dependents is allowed. This
is only allowed for dependents with Social
Security numbers. According to the Center on
Budget and Policy Priorities, 10 million
children from low-income families will receive
only about $75 of additional benefits.
3 The estate-tax exemption doubles to almost
$11 million per person. At the current exemption
amount, only about 0.2% of Americans who
die owe any estate tax. Doubling the exemption
amount would bring this number down greatly,
benefiting only ultra-high-net-worth families.

to a maximum principal of $750,000, and
deductions for home-equity interest
eliminated. This could depress residential housing
prices for high-price homes.
3 Miscellaneous itemized deductions, including tax
preparation fees, investment-management
fees, employee business expenses, and
professional dues eliminated. This does not have
an impact on those subject to the AMT. It hits
primarily working-class individuals and families.
3 Deductions for state, local, and property
taxes reduced to $10,000 combined maximum.
This provision, combined with the higher
standard deduction, means fewer people will
itemize. It is another provision that could
depress residential housing prices-especially
in high-tax states.
3 Moving expense deductions, except for military,
eliminated. This places a financial burden
on workers who need to move for employment.
3 Casualty loss deductions except for presidentially
declared disasters eliminated. This places a
financial burden on anyone incurring a casualty
loss such as a home fire or robbery. It also
means that insurance is more important than ever.

The law also eliminates the health insurance
mandate (penalty for not having medical
insurance) beginning in 2019. If this provision isn't
reversed before its effective date, it will lead
to millions of people opting out of health insurance,
which, in turn, can raise premiums for those
opting for coverage.
Business Provisions
3 The top corporate rate lowered to 21%
and eliminates the corporate AMT.
This is a huge reduction.

Increases for Individuals
3 Personal exemptions eliminated. At the current
$4,050 each, this elimination essentially offsets
any benefit from the standard deduction increase.
3 The mortgage interest deduction reduced
for new purchases of main and second homes

3 Tax reduction for "pass-through" entities
(sole proprietorships, partnerships, limited liability
companies, and S corporations) allowed,
not including personal-service businesses (unless
taxable income is less than $157,500 for
singles and $315,000 for married couples). These
provisions are complicated and convoluted.



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