The recent enactment of the Tax Cuts and Jobs Act (TCJA) represents “the most sweeping overhaul of the U.S. tax code in more than 30 years.”
For millions of Americans and businesses it means an altered financial and investment landscape, with new opportunities and challenges in the years ahead. Keep in mind, however, that the information is not intended as tax advice and may not be used for the purpose of avoiding any federal tax penalties.
Here’s a brief look at five key changes.
Some of the TCJA’s key provisions include a reduction in most marginal income tax brackets, near doubling of the standard deduction, and a $10,000 cap on state and local tax deduction. The Tax Policy Center projects that taxes will fall for all income groups and result in an increase of 2.2% in after-tax income. The Tax Policy Center also cautions, however, that some individuals and households may see a higher tax bill.
The TCJA did not adjust the preferential rates of 0%, 15% and 20% for long-term capital gains and qualified dividends. For example, the transition from 15% to 20% capital gains rate will continue to use the top tax-bracket thresholds of $425,800 for individuals and $479,000 for married couples.
The tax bill introduces several key changes for business owners, including the introduction of a 20% deduction for pass-through businesses. Business owners may want to review their current business structure (C-Corp, S-Corp and LLC) and determine what entity is best structured to help them accumulate retirement assets.
529 plans may now be used to fund private elementary and secondary education (for up to $10,000 in distributions per student each year). Prior, they were limited to eligible post-secondary institutions.
The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. As such, individuals benefiting from this change may want to re-evaluate the strategies they have in place to address the tax and liquidity issues that may no longer exist.
John E. Day is a financial consultant with LPL Financial Services, in Columbia. He can be reached at 410-290-1000, [email protected] or via www.daywm.com.