The end of the year is always a busy time for folks in the investment advisory business. There are charitable gifts to make, IRA distributions to send out, tax-loss harvesting for portfolios, and last-minute retirement plan contributions.
This year is even more complicated, because the rules of the game are changing.
Earlier this week, Trump's tax reform bill was approved by the Senate. It will go back to the House for further review before going to the President for his signature within the next month.
Here is a brief summary of what appears to be happening:
1) Corporate tax rates drop from 35% to 20%.
2) The number of individual tax brackets may or may not be reduced from 7 to 4.
3) The rates of the remaining tax brackets may be modestly lower (0.5% to 1%).
4) State and local income tax deductions will go away entirely. This is a big deal for residents of high-tax states (NY, NJ, CA).
5) The Alternative Minimum Tax (AMT) may or may not go away.
6) The individual exemption for estate taxes may double from $5 million to $11 million per person.
7) The $4,050 personal income tax exemption goes away. Child tax credits increase slightly.
8) Many changes in personal tax deductions:
A) The home mortgage deduction gets capped for mortgages in excess of either $500,000 or $1,000,000.
B) The property tax deduction would be capped at $10,000.
C) State and local income tax deductions will go away entirely. A big deal for residents of high-tax states (NY, NJ, CA).
10) Meanwhile, the standard deduction for married couples goes wayyyy up, from $12,000 to $24,000.
What this all means
While there have not been any definitive changes yet to the tax code, it is a clear shift away from itemized deductions.
Taxpayers can still choose between the greater of their combined "itemized" deductions or their "standard" deduction." Currently, 30% of Americans file itemized deductions. Under the new plans, it is estimated that only 5% will. It is not that itemized deductions will completely go away -- they just won't be as relevant any more.
On one hand, this will simplify a lot of tax returns. On the other, there may no longer be a tax incentive for many Americans currently making charitable donations - the itemized deduction that normal taxpayers have the most control over.
So give often, and maybe give a little early.
Jim Lee, CFA, CMT, CFP®