New Tax Plan: Here’s What You Should Know# Stock
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http://www.schwab.com/resource-center/insights/content/tax-reform-what-investors-should-know
By HAYDEN ADAMS
DECEMBER 20, 2017
The policy analysis provided by the Charles Schwab & Co., Inc., does not
constitute and should not be interpreted as an endorsement of any political
party, nor should the analysis be considered tax advice.
Congress has just passed the most sweeping tax code overhaul in decades.
Once signed into law, the majority of its provisions will kick in on January
1, 2018, with many of the changes expiring after 2025. The tax bill will
have almost no effect on your 2017 tax return.
Let’s take a look at some of the more important provisions within the bill,
and the likely effect on your taxes:
1. Tax brackets will change.
The final tax bill keeps seven tax brackets but changes the tax rates, which
shifts income into lower brackets. The long-term capital gains tax rates
remain essentially unchanged, and short-term capital gains will be taxed at
the adjusted ordinary income tax rates.
Most (although not all) taxpayers would owe less under the new rules,
according to analyses by various independent think tanks, including the Tax
Foundation and the Tax Policy Center. The impact of the changes would vary
based on each taxpayer’s income level, amount of itemized deductions and
other factors.
Current ordinary income tax brackets compared with brackets in the final tax
bill for tax year 2018.
Source: Schwab Center for Financial Research.
2. The standard deduction will increase.
The final tax bill nearly doubles the standard deduction, to $12,000 from $6
,350 for single filers, and to $24,000 from $12,700 for married filers.
About 70% of taxpayers claim the standard deduction, so most taxpayers
claiming this deduction likely will benefit from this proposal.
If you’re a low- or middle-income household, an increased standard
deduction combined with an increased child tax credit should lower your tax
bill.
3. Some itemized deductions are being reduced or eliminated.
The final tax bill reduces or eliminates many itemized deductions in favor
of a higher standard deduction.
The itemized deductions that will be reduced or eliminated include:
* State, local, and property taxes will be limited to a $10,000 deduction.
* Mortgage interest deduction will limited to $750,000 of indebtedness.
* Miscellaneous itemized deductions will be eliminated.
Here are the itemized deductions that will remain:
* Medical expenses: The final tax bill preserves the deduction for medical
expenses and temporarily reduces the limitation from 10% to 7.5% of adjusted
gross income for tax years 2017 and 2018. Beginning in 2019, only medical
expenses that exceed 10% of adjusted gross income are deductible.
* Charitable donations: The final bill preserves all the major charitable
donation deductions, with the exception of few specific deductions (such as
the deduction for payments made in exchange for college athletic event seats
).
All else being equal, if you’re in a high-income household in a high-tax
state, with a mortgage and high property taxes, these changes could end up
increasing your tax liability. However, if you don’t normally itemize your
deductions these changes won’t be an issue, and the increased standard
deduction should end up benefiting you.
4. The child tax credit will increase.
The final tax bill increased the child tax credit to $2,000 from $1,000, and
the income level of households eligible for the credit. The tax credit is
fully refundable up to $1,400, and begins to phase out for married/joint
filers at income of $400,000 and for single filers at $200,000.
Tax credits are generally better than tax deductions, because credits reduce
your taxes dollar-for-dollar, while deductions only lower your taxable
income. This change would benefit low- and middle-income households with
children.
5. The personal exemption and dependent deduction will be eliminated.
The final tax bill eliminates the $4,050 personal exemption and dependent
deduction. When combined with the increased standard deduction and increased
child tax credit, lower- and middle-income households should see a net
benefit despite the elimination of these deductions.
However, higher-income taxpayers could see an increased tax bill from this
proposal if they have large families and don’t qualify for the child tax
credit, because of the income phase-outs within the tax bill.
6. The alternative minimum tax (AMT) will be changed but not eliminated.
The final tax bill increases both the exemption amount and the exemption
amount phase-out thresholds for the individual AMT. Beginning in 2018 and
ending in 2025, the AMT exemption amount is increased to $109,400 for
married taxpayers filing a joint return and $70,300 for all other taxpayers.
The phase-out thresholds are increased to $1 million for married taxpayers
filing a joint return, and $500,000 for all other taxpayers.
These changes should benefit many middle- and high-income households that
were previously affected by this tax.
7. Treatment and calculation of cost basis on investment sales remains
unchanged.
The Senate tax bill had a provision in it that would have required investors
to use the “first-in, first-out” (FIFO) method to calculate cost basis
for investment sales. Investors can breathe a sigh of relief, as this
provision is not included in the final tax bill.
8. Changes to the taxation of income from pass-through entities.
This is a complex area of tax law, and the tax bill includes numerous
changes to the taxation of income from pass-through entities such as S
corporations, limited-liability corporations and partnerships. In general,
the tax bill allows businesses to exclude 20% of their net income from
taxation with certain limitations. The deduction would be disallowed for
specified service trades—such as lawyers, doctors and accountants—or
businesses with income above a threshold.
Overall the changes to the taxation of pass-through entities will be
beneficial to many business owners, but a lot of service businesses won’t
get to enjoy all the benefits of these changes.
9. The corporate tax rate will decline.
The final tax bill reduces the corporate tax rate to 21% from 35%. Lowering
the corporate tax rate will increase the profits of many companies, which
could provide additional capital for business expansion, increase dividends
to shareholders and make the U.S. a more attractive place for foreign
businesses to open operations.
10. There will be no changes to tax-deferred retirement accounts
Early on in the tax debate, it was rumored that Republicans considered
changes to the deductions taxpayers receive for contributing to tax-deferred
retirement accounts, such as IRAs or 401(k) retirement plans. The proposal
was not included in the final tax bill.
Bottom line
We believe investors should not overreact to the proposed changes in tax law
, especially if they have a long-term investment strategy and financial plan.
It’s important to remember that the impact of any of these changes on your
personal tax liability would depend on your specific circumstances. In
addition, the individual components of your tax bill, including earned
income, credits, deductions and other factors work together, like
interacting cogs. Therefore, each factor should not be assessed solely in
isolation.
By HAYDEN ADAMS
DECEMBER 20, 2017
The policy analysis provided by the Charles Schwab & Co., Inc., does not
constitute and should not be interpreted as an endorsement of any political
party, nor should the analysis be considered tax advice.
Congress has just passed the most sweeping tax code overhaul in decades.
Once signed into law, the majority of its provisions will kick in on January
1, 2018, with many of the changes expiring after 2025. The tax bill will
have almost no effect on your 2017 tax return.
Let’s take a look at some of the more important provisions within the bill,
and the likely effect on your taxes:
1. Tax brackets will change.
The final tax bill keeps seven tax brackets but changes the tax rates, which
shifts income into lower brackets. The long-term capital gains tax rates
remain essentially unchanged, and short-term capital gains will be taxed at
the adjusted ordinary income tax rates.
Most (although not all) taxpayers would owe less under the new rules,
according to analyses by various independent think tanks, including the Tax
Foundation and the Tax Policy Center. The impact of the changes would vary
based on each taxpayer’s income level, amount of itemized deductions and
other factors.
Current ordinary income tax brackets compared with brackets in the final tax
bill for tax year 2018.
Source: Schwab Center for Financial Research.
2. The standard deduction will increase.
The final tax bill nearly doubles the standard deduction, to $12,000 from $6
,350 for single filers, and to $24,000 from $12,700 for married filers.
About 70% of taxpayers claim the standard deduction, so most taxpayers
claiming this deduction likely will benefit from this proposal.
If you’re a low- or middle-income household, an increased standard
deduction combined with an increased child tax credit should lower your tax
bill.
3. Some itemized deductions are being reduced or eliminated.
The final tax bill reduces or eliminates many itemized deductions in favor
of a higher standard deduction.
The itemized deductions that will be reduced or eliminated include:
* State, local, and property taxes will be limited to a $10,000 deduction.
* Mortgage interest deduction will limited to $750,000 of indebtedness.
* Miscellaneous itemized deductions will be eliminated.
Here are the itemized deductions that will remain:
* Medical expenses: The final tax bill preserves the deduction for medical
expenses and temporarily reduces the limitation from 10% to 7.5% of adjusted
gross income for tax years 2017 and 2018. Beginning in 2019, only medical
expenses that exceed 10% of adjusted gross income are deductible.
* Charitable donations: The final bill preserves all the major charitable
donation deductions, with the exception of few specific deductions (such as
the deduction for payments made in exchange for college athletic event seats
).
All else being equal, if you’re in a high-income household in a high-tax
state, with a mortgage and high property taxes, these changes could end up
increasing your tax liability. However, if you don’t normally itemize your
deductions these changes won’t be an issue, and the increased standard
deduction should end up benefiting you.
4. The child tax credit will increase.
The final tax bill increased the child tax credit to $2,000 from $1,000, and
the income level of households eligible for the credit. The tax credit is
fully refundable up to $1,400, and begins to phase out for married/joint
filers at income of $400,000 and for single filers at $200,000.
Tax credits are generally better than tax deductions, because credits reduce
your taxes dollar-for-dollar, while deductions only lower your taxable
income. This change would benefit low- and middle-income households with
children.
5. The personal exemption and dependent deduction will be eliminated.
The final tax bill eliminates the $4,050 personal exemption and dependent
deduction. When combined with the increased standard deduction and increased
child tax credit, lower- and middle-income households should see a net
benefit despite the elimination of these deductions.
However, higher-income taxpayers could see an increased tax bill from this
proposal if they have large families and don’t qualify for the child tax
credit, because of the income phase-outs within the tax bill.
6. The alternative minimum tax (AMT) will be changed but not eliminated.
The final tax bill increases both the exemption amount and the exemption
amount phase-out thresholds for the individual AMT. Beginning in 2018 and
ending in 2025, the AMT exemption amount is increased to $109,400 for
married taxpayers filing a joint return and $70,300 for all other taxpayers.
The phase-out thresholds are increased to $1 million for married taxpayers
filing a joint return, and $500,000 for all other taxpayers.
These changes should benefit many middle- and high-income households that
were previously affected by this tax.
7. Treatment and calculation of cost basis on investment sales remains
unchanged.
The Senate tax bill had a provision in it that would have required investors
to use the “first-in, first-out” (FIFO) method to calculate cost basis
for investment sales. Investors can breathe a sigh of relief, as this
provision is not included in the final tax bill.
8. Changes to the taxation of income from pass-through entities.
This is a complex area of tax law, and the tax bill includes numerous
changes to the taxation of income from pass-through entities such as S
corporations, limited-liability corporations and partnerships. In general,
the tax bill allows businesses to exclude 20% of their net income from
taxation with certain limitations. The deduction would be disallowed for
specified service trades—such as lawyers, doctors and accountants—or
businesses with income above a threshold.
Overall the changes to the taxation of pass-through entities will be
beneficial to many business owners, but a lot of service businesses won’t
get to enjoy all the benefits of these changes.
9. The corporate tax rate will decline.
The final tax bill reduces the corporate tax rate to 21% from 35%. Lowering
the corporate tax rate will increase the profits of many companies, which
could provide additional capital for business expansion, increase dividends
to shareholders and make the U.S. a more attractive place for foreign
businesses to open operations.
10. There will be no changes to tax-deferred retirement accounts
Early on in the tax debate, it was rumored that Republicans considered
changes to the deductions taxpayers receive for contributing to tax-deferred
retirement accounts, such as IRAs or 401(k) retirement plans. The proposal
was not included in the final tax bill.
Bottom line
We believe investors should not overreact to the proposed changes in tax law
, especially if they have a long-term investment strategy and financial plan.
It’s important to remember that the impact of any of these changes on your
personal tax liability would depend on your specific circumstances. In
addition, the individual components of your tax bill, including earned
income, credits, deductions and other factors work together, like
interacting cogs. Therefore, each factor should not be assessed solely in
isolation.