A Quick Overview of The Tax Cuts and Jobs Act
The last couple months have been full of colorful media commentary and speculation about the GOP tax reform. We now have clarity; Well, as much clarity as can be expected from a 1,000 plus page piece of legislation. The Tax Cuts and Jobs Act of 2017 was passed by both houses of congress on December 20th, 2017 and is the most extensive tax reform we have seen in decades. Most of the provisions of this bill will go into effect for the 2018 tax year. There are many positives and negatives, but after analyzing much of the bill we have concluded that many of our clients will see a tax savings. This is not intended to be a political analysis. On the contrary, we are simply attempting to answer a question that matters to us dearly. The question is “Will our clients save money?”. Let’s take a look at who may or may not save after this bill goes into effect. Keep in mind, many of the individual tax changes expire in 2026 as a result, we will be using the 2018-2025 tax law.
Those Who Will Save
Middle Class Americans – We understand that the term “Middle Class Americans” is an overused and broad term. However, for the purposes of this article, the term fits. Due to an increase in the standard deduction (from $6,350 to $12,000 for individuals and $12,700 to $24,000 for joint), a doubling of the child tax credit ($1,000 to $2,000), and a reduction in tax brackets most Americans will pay less in taxes. The Tax Policy Centerestimates that in 2018 on average the bottom 80% of income earners will see an increase in after income of up to 2%. That is not to say there are no caveats. Families with college age children could actually come out worse, due to the elimination of personal exemptions. Additionally, while the new tax brackets are almost always more beneficial for those married filing jointly there are several instances when the new tax brackets are a negative for single filers.
Corporations – The Tax Cuts and Jobs Act eliminates Alternative Minimum tax for corporations and consolidates corporate tax rates down to 21%. This is a large part of why we have seen the stock market do so well in response to this legislation. Reduced taxes for corporations means more profits for its stockholders. Whether there are additional “trickle down” benefits to working class Americans is not clear and something we are not comfortable commenting on. However, in response to the passage of this bill several companies (AT&T, Comcast, Boeing) have announced employee bonuses or expansions of philanthropic efforts.
The Wealthy – A reduction in the top marginal tax bracket from 39.6% to 37%, an increase in the income needed to reach the top bracket, and an increase in the size an estate has to be before it is subject to estate tax ($5.6 to $11.2 million per person) are the main reasons the wealthy will benefit from this bill. It is also worth mentioning that even though Alternative Minimum Tax (AMT) was not repealed, it will now apply to less Americans. The income thresholds for AMT are now $500k in income for individuals and $1 million for a couple.
Small Business Owners – In addition to the above mentioned benefits (lower tax rates/brackets, etc.) that small business owners can participate in, those who own pass through entities (LLCs, partnerships, sole proprietors, and S-corps) are now able to receive up to a 20% deduction on their net profits. Essentially this means that flow through profits for many small business owners will receive a 20% deduction before their individual tax rate is applied. Unfortunately, not all businesses are able to utilize this deduction. Specifically service businesses (attorneys, accountants, and Financial Strategies group) will not be able to utilize this deduction.
Those Who May Not Save
Charities – Although non-profits do not pay taxes, they may see some downturn in donations. The increase in the standard deduction means that many Americans who were itemizing expenses (including charitable expenses) will no longer itemize. Although this is not a direct negative for those giving, it does remove the tax savings incentive for some that give charitably. There are strategies that can help individuals get the most from giving though. For those 70 ½ years or older Qualified Charitable Contributions (QCDs) are a great option! See Brandon Carter’s article on QCDs here Qualified Charitable Distributions. For those who have the resources, doubling up on your charitable contributions for one year and skipping the next can make sense also.
High Tax State Residents– The Tax Cuts and Jobs act caps deduction of State & Local Income Tax and Property Tax (SALT) at $10,000. High income earners in states like New York, New Jersey, and California (top tax bracket of 13.3%) or those with larger personal property tax bills may feel the pain of this limited deduction. Previously individuals were able to deduct all SALT taxes now with a total deduction of $10,000 many above average and average earners in high tax states may see a higher tax bill.
Summary– Not every single household will be paying less in taxes, but on average, every income quintile will be paying less. While researching data for this article, we were reminded of the importance of researching the source of any and all news about a political topic. For us, the matter of tax reform was not political, but rather analytical. That is why it was truly disturbing to see the amount of politically skewed news reports on this tax reform. This is not a single sided issue, as the reporting from both perspectives were less about facts and more about rhetoric. We hope you found this article helpful and we look forward to discussing how these changes affect you personally in the coming year.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
This article is written by Brandon Carter and Brice Carter.