Tax Changes and Your Investments
The new tax law has a number of changes that affect individual and business taxpayers, but in the end, the tax treatment of investments was hardly touched.
CAPITAL GAINS TAX
One big change is how the long-term capital gains tax rate is determined. Previously, this rate was based on income tax brackets. Starting in 2018, long-term capital gains – profits on the sale of assets held for more than one year - will be taxed according to taxable income levels, but at the same rates as before.
Joint tax filers with a taxable income of less than $77,200 pays 0% on realized long-term capital gains. The same couple pays 15% on long-term gains between the 0% limit and $479,000, and gains over this amount are taxed at 20%.
Income from investing in Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts will be taxed differently. Investment income of over $2,100 in the name of a child (younger than 19 or, if a full-time student, 24) was previously taxed at the parents’ tax rate. Now, it will be taxed at the trusts and estate tax rate.
If you contribute to a 529 plan, you can use up to $10,000 annually for qualified primary and secondary education costs. Previously, the plan was strictly a college investing vehicle. Also, tax-deferred, like-kind exchanges of tangible assets are no longer allowed, except for real estate.
Congress considered a handful of other moves that would have affected individual and retirement investors, but most other tax breaks were eventually left alone. This includes the tax-deferred status of contributions to qualified retirement plans and the allowable amounts that qualify for favorable tax treatment. Talk to us to learn more.
529 Plans Expanded
Another change contained in the recent tax bill is the expansion of what constitutes a qualified withdrawal from a 529 plan for education expenses. Previously designed for higher education only, a 529 plan now allows up to $10,000 in tax-advantaged withdrawals per year per beneficiary for qualified grade school (if your state allows) and high school education expenses.
While you can’t deduct contributions made to a 529 plan on your federal tax return, potential earnings accumulate on a tax-deferred basis. The account owner controls distributions, which incur a tax penalty and income taxes if taken for nonqualified events.
A 529 is also a nice estate planning tool. That’s because you can make a single-year contribution per person, per beneficiary, of $75,000, free of federal gift tax. You can’t make a gift to the same beneficiary for the next four years if you do this.
Tax Cuts and Jobs Act of 2017 highlights:
TAX RATES LOWER
The headline here is individual tax rates are lower, while brackets are expanded. The accompanying graphic shows the difference for married taxpayers filing jointly. Taxpayers filing as single, married filing separately or head of household will enjoy similar reductions.
WIN SOME, LOSE SOME
The standard deduction is also up considerably, but the personal exemption disappears. For example, taxpayers filing jointly will see the standard deduction rise from $12,700 in 2017 to $24,000 in 2018 when exemptions ($4,050 each in 2017) go away. The child tax credit doubles to $2,000, with qualifying income thresholds rising sharply to $400,000 for couples filing jointly and $200,000 for other tax filers. However, kiddie tax changes could raise taxes owed for some. Unearned income for children under age 18 will be taxed as trust and estate income, not as parents’ income as before.
YOUR ADDRESS MATTERS
Some taxpayers won’t be able to deduct all their real estate, sales and local income taxes. They are capped at $10,000. The mortgage interest rate deduction (on loans originated after December 15, 2017) applies only on the first $750,000 of a mortgage. The deduction applies to interest on mortgages up to $1 million taken before then. Home equity loan interest is not deductible starting in tax year 2018.
Deductions for tax preparation, alimony and moving expenses are among the miscellaneous itemized deductions that will disappear. However, you can deduct charitable contributions up to 60% of income (it is 50% in 2017). The medical expense deduction threshold is also lowered for 2017 and 2018.
ODDS & ENDS
And there’s much more, including:
• Repeal of the health insurance mandate (after 2018);
• 529 accounts may be used for tuition for elementary and secondary education;
• The Alternative Minimum Tax (AMT) has higher exemptions and phase-outs;
• The estate tax exemption doubles.
There are additional changes, so talk to your tax professional to learn more.