Sharpen Your Pencils – The New Tax Code and Tax Planning

Sharpen Your Pencils – The New Tax Code and Tax Planning

By Michael Maiorano, CFP®, CPA/PFS

“Don’t tax you, don’t tax me, tax that fellow behind the tree,” quipped Senator Russell Long, who chaired the powerful Senate Finance Committee from 1966 to 1981. It’s a timeless sentiment when it comes to tax reform debates in Washington.

Late last year, just after Halloween, House Republicans introduced their version of tax reform and very few observers thought such a massive undertaking could be signed into law in the seven short weeks prior to year-end. But that is exactly what happened. In the hectic days leading up to the Christmas holidays, the president signed into law the most sweeping change in the tax code since 1986.

“The legislation will result in substantive tax reform for corporations, with the elimination of the corporate alternative minimum tax (AMT) and consolidation down to a single 21% tax rate (from 35%), all of which are permanent,” Michael Kitces, a respected authority on tax issues, wrote on

“However,” he added, “When it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to another infamous sunset provision after the year 2025.”

Highlights of the Tax Law

Over 80% of Americans will get a tax cut next year, while just 5% of taxpayers are expected to pay more (Tax Policy Center, Washington Post). However, much will depend on individual circumstances and, in most cases, cuts are expected to be modest.

We will touch on the high points here. It’s not all-inclusive nor is it a deep dive, but is meant to be an overview to address numerous questions we’ve received from our clients. Due to the complexities of the new law, we encourage you to check with your tax advisor on how the bill will impact your individual tax situation. So, let’s get started. All points below apply to tax year 2018.

  1. Tax Brackets: The 10% bracket remains unchanged, while the 15% bracket declines to 12%. Similarly, the 25% bracket declines to 22%, 28% to 24%, and 33% to 32%; while the 35% bracket holds steady, and the 39.6% slips to 37%. Income thresholds are modestly adjusted above the new 22% bracket.
  2. Standard Deduction: The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filers, reducing the incentive to itemize deductions and simplifying tax filing for many taxpayers.
  3. Exemptions & Credits: The $4,150 personal exemption is eliminated, and the $1,000 child tax credit doubles to $2,000 (a portion of which is refundable). In general, rules for charitable contributions remain unchanged, but cash contributions are limited to 60% of adjusted gross income (AGI) vs. the pre-reform limit of 50%. By itself, the combination of points one, two, and three above should provide modest tax relief for most families. But, again, it depends on your individual circumstances.
  4. State and Local Property Taxes: Those in high-tax states could see the biggest hit, as there will be a $10,000 cap on state, local, and property tax deductions.
  5. Investments: For investors, the preferential treatment for long-term capital gains and dividends remains intact, as is the case for retirement accounts, generally. One important change: the new law repeals rules that allow for re-characterizations of Roth IRA conversions back into traditional IRAs. Once you convert into a Roth, there’s no going back.
  6. Deduction of Fees: The deduction for miscellaneous itemized expenses, which includes investment management fees, tax preparation fees, safe deposit box fees, and other similar deductions, has been repealed.
  7. Medicare Surtax: The 3.8% Medicare surtax on investment income for high-income taxpayers was retained.  Since the levy entered the tax code, we have crafted strategies that reduce its bite. However, the surtax survived and is likely to remain a permanent feature of the tax code going forward.
  8. Alternative Minimum Tax (AMT): The AMT for individuals was not repealed, but exemptions have been widened. Ideally, it would have been eliminated from the tax code. But Kitces points out, “While the AMT commonly impacted those around $150,000 to $600,000 of income, in the future, AMT exposure will be much smaller, and it will be extremely difficult to be impacted at all, especially given more limited deductions.”
  9. Estate Tax: The estate tax also survived, but the exemption will double from $5.6 million to $11.2 million for individuals and $11.2 million to $22.4 million for couples.  With that being said, these increased exemptions will expire after 2025 and revert back to pre-2018 levels with inflation adjustments. Therefore, there is a possibility for “clawback” at death, if the law is not changed.
  10. Health Insurance: Effective 2019, the new law will also eliminate Obamacare mandates that require all individuals to obtain health insurance.
  11. Business Taxes: Given that the 21% corporate tax rate applies only to C-corps, there will be a 20% deduction for many pass-through entities, such as S-corps, partnerships, and LLCs. While this should be a welcome relief for many business owners, complex rules may limit the benefit for some entities.
  12. Sunset Provision: It’s important to point out that many of the more popular changes in the tax code for individuals will sunset in 2025. While many provisions may eventually be made permanent, as we saw with the Bush tax cuts of 2001 and 2003, there’s no guarantee this will happen again.

Final thoughts

We fully anticipate that the rewrite of the tax code will produce many unexpected benefits and consequences.

From an economic standpoint, Congress and the president hope to restore consumer confidence and spur capital investments that have been lethargic for much of the economic expansion. They hope that changes, especially as they relate to business, will encourage firms to open new plants, expand in the U.S., and level the playing field with the global community.

Prior to reform, the U.S. corporate rate was the third highest among 188 nations (Tax Foundation).

The big question is will it work? About 90% of economists surveyed by The Wall Street Journal expect a modest boost to economic growth in 2018 and 2019, but after that, opinions diverge.

If tax incentives boost productivity, it could lift GDP over the long-run, which could yield a significant benefit. If the economic benefits end after a two-year sugar high, it will likely be deemed a failure.

Early anecdotal data offer some encouragement, as several large firms announced year-end bonuses or wage hikes tied to the lower corporate tax rate.

At a minimum, the lower tax rate increases longer-run after-tax earnings, which played a big role in the late-year stock market rally. It could also boost corporate stock buybacks and dividends going forward, which could create an added tailwind for stocks.

That said, we are cautiously optimistic the tax reform will encourage entrepreneurship and economic growth and be an overall benefit to hard-working Americans.

If you’re still uncertain on how tax reform impacts you, please call your TrueWealth advisor to discuss your concerns.

Michael Maiorano is CEO of TrueWealth, LLC a wealth management firm located in Atlanta. He has extensive experience in financial planning for Business Owners and Ultra-High Net Worth Individuals & Families. He can be reached at or 404.487.0501.



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