January 17th, 2018
On December 22nd, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). We have received many inquiries from clients regarding the impact the TCJA will have on their tax liability. The new law reduces or eliminates many of the deductions afforded to taxpayers who currently itemize their deductions rather than take a standard deduction on their tax return. We have included below a summary of the key changes to the tax code as well as strategies available to lower your tax bill.
- The TCJA continues to provide seven income tax brackets and three capital gains tax brackets, however, the thresholds have been modified and the highest marginal income tax rate has been lowered to 37%. Qualified dividend and long term capital gain tax rates remain 1
- The standard deduction is raised from $6,350 in 2017 to $12,000 in 2018 for single taxpayers, from $12,700 to $24,000 for those married filing jointly and from $9,350 to $18,000 for taxpayers filing as head of household. The personal exemption ($4,050 in 2017) is eliminated in 2018.2
- Itemized deductions for state and local income and property tax are limited to $10,000 and $5,000 if your tax status is married filing separately. Itemized deductions for investment management fees, tax preparation fees and unreimbursed employee expenses are 3
- The TCJA reduces the maximum amount of mortgage debt for which you can claim a mortgage interest deduction from $1,000,000 to $750,000 for married individuals and from $500,000 to $375,000 for those married filing separately. The old law still applies to homes acquired before the new law was enacted. The deduction allowed for interest paid on home equity lines of credit is eliminated in 2018. The current law regarding the exclusion of up to $250,000 of capital gains on the sale of a residence for individuals and $500,000 for married individuals (provided the other existing requirements are met) remains intact.4
- The new law expands the medical expense deduction in 2017 and 2018 to cover medical expenses that exceed 7.5% of Adjusted Gross Income (AGI), however, the limitation increases to 10% of AGI for the years 2019 through 5
- For divorce or separation agreements entered into after December 31st, 2018, alimony payments to a former spouse are no longer tax deductible by the payor and recipients no longer pay income tax on alimony payments.6
- In 2018, taxpayers may receive tax free distributions from 529 plans of up to $10,000 for private school tuition for children in grades K-12.7
- The new law expands the child tax credit from $1,000 to $2,000 per child under age 17 starting in 2018 and raises the income threshold allowing single filers with wages up to $200,000 and married individuals with wages up to $400,000 to claim the full 8
- The gift tax annual exclusion increases to $15,000 in 2018 up from $14,000 in 9
- The new regulations double the estate and generation skipping tax exclusion to $11.2 million per person and $22.4 million for couples through 10
Charitable Gifting Strategies
The new law continues to allow taxpayers to deduct charitable contributions; however, taxpayers may find that the newly raised standard deduction exceeds their total allowable itemized deductions thereby eliminating the need to itemize and the direct tax benefit of making charitable donations.
While direct gifts to charities may no longer yield a tax benefit, there are two other strategies that may be utilized by taxpayers who are charitably inclined. If a taxpayer is age 70 ½ or older and is required to take Required Minimum Distributions (RMD’s) from their Traditional IRA account, the taxpayer may choose to make a Qualified Charitable Distribution from their IRA (QCD). The benefit of making a QCD is twofold: the taxpayer satisfies their Required Minimum Distribution and avoids paying income tax on the withdrawal.
Under the QCD rules, the check must be made payable to a public charity as described in IRC Section 170(b)(1)(A) and is limited to $100,000. The check may be mailed directly to the account owner and then forwarded to the charity. Distributions must be made from a Traditional IRA rather than a qualified retirement plan. To ensure both the timely distribution of the check from the account and negotiation of the check by the charity, the process should be started by the beginning of the fourth quarter.
Another strategy a taxpayer may employ is establishing a Donor Advised Fund. A taxpayer who contributes cash to the fund may receive a full deduction up to 60% of the Adjusted Gross Income (AGI) in 2018.
Taxpayers may also contribute appreciated securities and avoid paying capital gains if held more than one year. The full market value of securities contributed may be deducted up to 30% of AGI. With the change in the standard deduction, it will be important to plan the amount and timing of the donations to maximize the tax benefit. The taxpayer may want to lump several years of contributions at once to maximize the tax benefit. The minimum deposit to establish a Donor Advised Fund at Charles Schwab is $5,000. Once the account is open and funded, the donor can choose to invest the funds in equities or fixed income or leave the funds in a money market account. The donor can then make a donation, or grant request, through Charles Schwab with a minimum amount of $50. A check for the amount of the grant is then sent to the charity. The taxpayer receives a deduction in the tax year the assets are deposited into the fund. No deduction may be taken when the taxpayer makes the grant request.
Carmichael Hill can assist with either of the above charitable giving strategies. We recommend speaking with a tax professional to determine if you would benefit from implementing one of these strategies.
Susan Victory, CFP®
1. Fool.com:“Your Guide To Capital Gains Taxes In 2018”, December 22nd, 2017
2. MarketWatch: “Should You Prepay Your 2018 Property Taxes And 9 More Things To Know About The New Tax Law”,
3. December 28th, 2017
4. Investopedia.com: “How The GOP Tax Bill Affects You”, January 3rd, 2018
5. MarketWatch: “Should You Prepay Your 2018 Property Taxes And 9 More Things To Know About The New Tax Law”,
6. December 28th, 2017
7. CNBC.com: “GOP Tax Bill Expands Medical Expense Deduction For Two Years”, December 16th, 2017 6, WTOP.com, “What The New Tax Law Means For Your 2018 Finances”, January 10th, 2018
8. Barrons.com, “How To Get The Most Out Of New Tax Law”, January 5th, 2018
9. Fool.com: “The 2018 Child Tax Credit Changes: What You Need To Know”, January 9th, 2018 9, 10, Forbes.com, “IRS Announces 2018 Estate And Gift Tax Limits: $11.2 Million Per Couple