Articles
Purposeful.Finance
> Purpose
> Budgeting
> Income
> Investing
> Managing Debt
> Managing Risk
> Taxes
Editorial Guidelines
Crowd Investing
Take The Challenge
Non-Profit Initiatives
Low-Cost Financial Coaching
Financial Literacy Seminars
Education & Advocacy
Annuity Analysis & Review
2020 Annual Report
Donate

purposeful.finance

Articles
Purposeful.Finance
> Purpose
> Budgeting
> Income
> Investing
> Managing Debt
> Managing Risk
> Taxes
Editorial Guidelines
Crowd Investing
Take The Challenge
Non-Profit Initiatives
Low-Cost Financial Coaching
Financial Literacy Seminars
Education & Advocacy
Annuity Analysis & Review
2020 Annual Report
Donate
Tax Reform: Major Changes for Individuals and Families
January 24, 2018
Taxes
Joshua Escalante Troesh, CFP
Tax Reform: Major Changes for Individuals and Families
Joshua Escalante Troesh, CFP
January 24, 2018
Taxes

Tax Reform: Major Changes for Individuals and Families

Joshua Escalante Troesh, CFP
January 24, 2018
Taxes

Tax Cuts & Jobs Act Impact on Individual/Family Taxes

Although the tax reform was pitched as a simplification of the tax code, the nearly seven-hundred page Tax Cuts and Jobs Act do little to simplify the number of pages in the tax code. You, however, will probably see much simpler taxes in the coming years because the vast majority of taxpayers will no longer need to itemize deductions.

For an estimated 94% of taxpayers, their taxes will be simpler mainly because the standard deduction is so extremely attractive. Gone will be the days of all the paperwork and filing requirements associated with itemizing deductions. So from that measure, the Tax Cuts and Jobs Act definitely did simplify taxes for many.

Tax Planning is Still of Vital Importance

Even though most will use the standard deduction, tax planning remains an important part of a comprehensive financial plan. While it seems all anyone talks about is the itemized deductions, that is an over-sized amount of focus to be placed on one line out of the 79-line Form 1040. Those who take the standard deduction will still lots of opportunity to be helped (or hurt) by the new tax code.

To prepare, the following are many of the major changes to the tax code which will impact individuals and families. (The new tax brackets are covered in another article.) Use this information to manage your taxes or talk with your financial adviser or tax adviser about how these provisions will impact your personal taxes.  

Estate Tax & Gift Tax Exemption Doubled

The estate & gift tax exclusion double the exclusion under the tax reform, which now allows an individual to pass up to $11.2 million on to heirs estate tax free. Portability brings it up to $22.4 million for married couples.

Although many have worried about the economic impact of an increase in the estate tax, others argue the increase will actually be a net positive to government revenue. Both sides are correct in their theories.

The estate tax is the most costly tax the IRS has to enforce. The IRS must review non-standardized business valuations, property valuations, and collect an enormous amount of information about every possible asset before it can run the numbers. For massive estates, this is well worth it - but for small estates the cost of enforcement is more than the tax revenue generated. The only question is, where is that line? 

Alimony No Longer Taxable Income

Beginning January 2019, alimony will no longer be taxable income to the recipients. The payer of alimony will also no longer receive a deduction for alimony paid. This rule only applies to divorces which are finalized after December 31st 2018. Congress gave this window to allow divorce agreements time for divorce agreements which are currently to be completed.

Typically, this will favor the lower-income divorcee (usually women), although a good divorce attorney will likely factor this into the calculations and negotiations. For divorcing couples, the changes to how Alimony is treated will become extremely important in negotiating divorce agreements. 

1031 Exchanges Limited to Real Estate

Real estate investors probably had their heart skip a beat when they read there was a change to the 1031 Exchange laws. Fortunately, they don't have to worry, as real estate is the only thing which can now be exchanged under section 1031.

While real property is the most talked about 1031 exchange, investors and businesses could actually use the 1031 Exchange laws to avoid current taxation on any type of property. This includes equipment, vehicles, and even artwork. Now 1031 is only limited to real estate.

AMT Gets More Progressive

The Alternative Minimum Tax (AMT) remains in the tax code, although the reform did make it more progressive. Under the old law, many middle-income families were caught up in the AMT due to it not being indexed for inflation for 40 years

The AMT exemptions were increased to $109,400k for married filing jonitly (MFJ), $54,700 for married filing single (MFS), and $70,300 for all others except estates and trusts. Those slightly over those exemption amounts will also not lose their exemptions as the phase outs start at $1 million for MFJ and $500 for all others.

Additionally, many preferences items which used to trigger the AMT are not there anymore because the tax code eliminated the deductions (so basically no one gets them). For example, state taxes used to trigger the AMT for dual-income professional households in states like California and New York. With the new limitation on state tax deductibility, the AMT will no longer be triggered.

While the tax reform didn't solve the problem, the AMT now more closely resembles it's intention to apply to higher-income individuals.

Shared Responsibility Penalty

Republicans couldn't "repeal and replace" the Affordable Care Act, but they did make the penalty for not having insurance easier to deal with. The tax code still requires everyone to buy insurance under the Affordable Care Act, but the penalty will be set to $0 for 2019 and beyond. Notice, the penalty still applies if you do not have health insurance during 2018. If you cancel your insurance during 2018, you will still have a penalty assessed for not having health insurance.

529 Plan Now More Powerful

The 529 plan is an integral part of helping families pay for education for their children. The new tax reform added two new features to the plan which will help all families, but especially families who have children with disabilities.

Pre-College Education Expenses

First, up to $10,000 per beneficiary (not account) may be used for elementary and secondary school expenses. This is a big improvement for families who want to provide tutoring, test-prep education, supplemental help, or private education to their children. The money can also be used to pay for dual enrollment with a college, allowing a child to finish high-school classes and earn college credit at the same time.

Those who home school their kids can also use 529 money for home school expenses including curriculum, books or other instruction materials, and online education. For those with disabled children, the same $10,000 can be used for educational therapies.

Provide for Disabled Children through ABLE Rollovers

Under the new tax code, now any unused money in a 529 can be rolled over to an ABLE Account for the benefit of a dependent with a disability. ABLE Accounts are an Obama-era creation which allow disabled children to have money for their support without threatening their Medicaid or other government aid. 

Rollovers can come from the disabled child’s 529 or from any family member’s. Rollovers from family members count toward the annual funding limit for the ABLE account. Check with your tax adviser or financial planner to see if the entire amount can be rolled over from the special-needs child's 529.

Anti-Abuse Provisions

Although it's not talked about a lot, one of the goals of almost every tax reform or major update to the tax code is to limit what Congress feels are abuses of the tax code. Things which clever tax advisers and financial planners do to legally help their clients limit their tax exposure, but which Congress never intended.

The following are the elements of the tax plan which are intended to either close loopholes or stop people from legally, but in the eyes of Congress unfairly, taking advantage of tax law. 

Limitation of Excess Business Losses

Business owners of pass-through entities used to be able to take massive amounts of business losses against their personal income taxes. This type of tax shelter allowed high-income individuals to significantly reduce their incomes. Now, losses being claimed on a tax return in excess of $500,000 for MFJ or $250,000 for all others will be denied. Instead, the loss will be added to a taxpayer’s net operating loss for subsequent years.

While business owners will still be able to use the losses, they won't be able to use them to avoid current income taxes.

Kiddie Tax on Steroids

Children with income above a couple thousand dollars will now pay taxes at the trust tax rates, which reach the top tax brackets at extremely low income levels. In 2017, trusts hit the top tax bracket at $12,500.

This rule is an expansion of the Kiddie-tax rule which was enacted to stop wealthy taxpayers from avoiding taxes by passing income-producing assets to their children. In the past, wealthy individuals in the top tax bracket would shift income to their kids by transferring assets. This saved on taxes for a simple reason, a two year-old child is in the lowest tax bracket. Congress has now fully closed that tax loophole.

No More Roth Conversion Recharacterizatoins

A Roth Conversion is when a person converts a Traditional IRA to a Roth IRA, which would accelerate the tax liability to today, but would make the IRA money tax-free for the future. Under the old rules, a taxpayer could do the conversion and then wait until next year to see if converting in the new year would cost them less in taxes. If the tax cost was less (say the portfolio dropped in value also reducing the taxes due), the person could hit the reset button and do the conversion in the following year instead.

Congress saw this as a strategy intended only to avoid taxes (which in many cases it was) and decided to close the loophole. Now, if you convert a Traditional IRA to a Roth, you better be comfortable with the decision.

Joshua Escalante Troesh.jpg

Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career includes having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org

Tagged: Income Tax, Roth IRA, Individual Retirement Account, Affordable Care Act ACA, Tax avoidance, Tax help, Tax planning, Tax Refund, Tax Advice, Estate planning, Real estate investing, Investment Real Estate, Real estate financing, Mortgage, Home Mortgage, Affording College, Alternative Minimum Tax, 529 Plan, ABLE Account, Kiddie Tax

Newer PostWhy File Income Taxes Early If You Aren’t Getting a Refund
Older PostTax Reform: New 2018 Tax Tables, Deductions, & Exemptions
Guide to opportunities to lower your taxes

SOME STRATEGIES EXPIRE WHEN THE 2017 TAX CUTS & JOBS ACT SUNSETS

Inside this guide from Purposeful Strategic Partners, you’ll discover:

  • The costly “domino effect” caused by changes to tax laws (and what to do)

  • Specific tax savings to tap BEFORE income tax rates jump

  • The tax bundling strategy used by high income earners

Get The Guide

A Proven Step-By-Step Personal Finance Program from Purposeful Finance

A Proven Step-By-Step Personal Finance Program from Purposeful Finance

Learn more

Have a Question?

If you have a specific question on the article or anything else financial, please feel free to ask. We will do our best to answer you!

Get Your Personal Finance Question Answered
Name *
Please provide any background information or clarifications to help answer the question.

Thank you! We will attempt to answer your questions shortly, but we do get a large volume of questions. It may take up to a month for a response to your question.

Purposeful Finance may also write an article related to your question. Your personal information will never be revealed.


get new Articles:

Weekly Email

Subscribe to receive new articles and a specific action to take each week to improve your financial situation. 

We respect your privacy and do not sell your information to third parties.

Thank you for subscribing!

You have been sent a confirmation e-mail from info@purposefulfinance.org. Please open the e-mail and click on the link to confirm your subscription. If you don't see your e-mail, please check your spam or promotions folders, and move the confirmation e-mail to your main inbox.

To ensure you receive your weekly Action Item and New Articles, please add info@purposefulfinance.org to your contacts or white-list in your e-mail program.

You will receive your first action itemand articles next Tuesday at 10 A.M. PST. 


Launch Your FInancial SUccess

Take control of your finances with a proven step-by-step program and on-demand resources. Learn More

  • Create a Budget

  • Manage Debt

  • Build Savings

  • Align finances to your values

  • & More

Created by a Tenured Professor & CFP and offered by Purposeful Finance, a 501(c)3 charity

Learn more

Purposeful.Finance RSS

RECENT ARTICLES:

Featured
Taxes
IRS 2023 Tax Tables, Deductions, & Exemptions
Taxes
Taxes
Investing, Managing Risk
How Today's and Future Inflation Impacts Your Retirement
Investing, Managing Risk
Investing, Managing Risk
Budgeting
Why Today's Inflation Isn't the Hyperinflation of the 70s
Budgeting
Budgeting

Contact Form

Thank you!

Subscribe to get weekly action steps and the most recent articles to help you get closer to your goals. 

We respect your privacy and do not sell your information to third parties.

Thank you for subscribing!

You’ll receive your first Purposeful Finance Challenge and articles next Tuesday morning.

To ensure you receive your weekly Action Item and Articles, please add info@purposefulfinance.org to your contacts or white-list in your e-mail program.

Back to Top
Home
About
Why Purpose
Our Purpose
Our Story
Founder Bio
Privacy Policy
Financial Planning
Financial Coaching
Purposeful Finance, 5428 Vinmar Ave, Rancho Cucamonga, CA, 91701, United States

Purposeful Finance is an approved 501(c)3 non-profit organization Tax ID: 82-4392585. The content provided is meant for educational purposes only and is not meant to provide individual advice. The information provided here is not to be construed as investment, legal, tax, financial, nor insurance advice. Your personal situation is unique and the information provided on the website cannot and should not be directly applied to your individual financial needs. Before making any financial decisions you should seek the help of a qualified financial adviser to discuss the tax, legal, risk, and investment implications.  All articles and content copyright 2019 Joshua Escalante Troesh and licensed free-of-charge to Purposeful Finance.

*Investment advising and complex financial planning provided through Purposeful Strategic Partners, a registered investment advisory firm. Ranked #1 advisor on Investopedia Advisor Insights November 2018 to July 2019 when Investopedia discontinued Advisor Insights. Investopedia Advisor Insights ranking based upon the helpfulness of answers to questions posted on the Investopedia website as voted by Investopedia’s audience. Ranking does not consider investment returns, client satisfaction, or other factors. Registration as an investment advisor refers to legal licensing of the advisor and does not imply a certain level of skill or training.