Thanks for coming back to read Telos Financial’s blog, where I discuss sundry financial topics. The purpose of the blog is to introduce financial planning concepts that I believe are important & start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
The TCJA is short for the Tax Cuts and Jobs Act and was signed into law December 22, 2017. It was designed to stimulate the economy and reduce taxes. While it’s estimated to save households an average of $1,600 each, it is mostly directed at businesses. This is not meant to be tax advice or a comprehensive summary of the bill. Please note that the IRS is still interpreting the bill and issuing clarifications.
This bill is not tax reform, since it’s temporary, but it is a step in that direction. It was a monumental bill, since it was the first major legislation completed in the year, and it was the biggest change to the tax code in years.
Proponents of the bill laud it for reducing taxes and saving corporations money. They speculate the corporations will reward workers with the extra cash. We have seen this in some cases and have seen the opposite in others. Critics of the bill say it will increase the federal deficit, since it will reduce the amount the federal government brings in in tax revenue. They also say reiterate that corporations were already sitting on record levels of cash and are more likely to pay executives more, than to increase compensation for the rank and file employees. I’m going to discuss some of the key items that changed that I expect to affect most families. Please note that there are exceptions, additional rules, requirements to many of these points. For this blog, I’m going to focus on effects to individual families, keep in mind most of the bill was directed at businesses.
Some of the major changes brought about by the new law are:
• A largely reduced tax schedule (effective for 8 years for individuals and permanent for businesses)
• An increased standard deduction for individuals
• An increase in the estate tax exemption
• A repeal of the individual mandate for the Affordable Care Act (ACA).
On an individual basis, your effective rate will probably go down by a few percentage points. For corporations, the law lowers the top rate from 35% to 21% and for pass throughs businesses that qualify, allows a 20% exemption on “qualified” earnings.
So, you’re probably wondering, “what does this mean for my family?” The increased standard deduction means many families will have simpler taxes. Many of the itemized deductions were removed, which also is a movement to push families to use the standard deduction. The standard deduction was increased from $6,500 for Single filers and $13,000 for those who file Married Filing Jointly (MFJ) in 2018 to $12,000 for Single filers and $24,000 for MFJ filers.
That means, as a married filing jointly household, you would have to over $24,000 in deductions to necessitate filing an itemized return. That’s a pretty high bar. In previous years, you could claim a lot of different expenses (with restrictions & limits) including: mortgage interest, interest on home equity loans and lines of credit, medical expenses, fees you paid for investment advice, state and local taxes (these have been capped). You can still claim some of these, but the restrictions have been made more stringent. The effect of that will be more folks utilizing the standard deduction. Does that mean taxes will be easier? Will it eliminate tax preparation jobs? We will see, but the bill seems to have created as many new questions and complications as things it simplified, so it may simply result in a shift in the need for tax preparation.
If you use the health care exchange (Obamacare), things are certain to change for you. At a minimum, you will have to navigate a new system and learn different rules. Whether you are unemployed, retired early and aren’t eligible for Medicare yet, or aren’t offered health insurance through your employer, you won’t be required to have health insurance in the future. If you don’t want insurance or choose to self-insure, you will no longer be penalized for this.
What else changed? The estate tax exemption has doubled. While this is a hot item of interest and I get a lot of questions about it, it will only affect a few families. Everyone is concerned with paying too much in taxes, but this one has always been a tax for the very wealthy. In 2018, as an individual, your estate (net worth) has to be over $11,180,000 and double that for a married couple. Prior to the TCJA, it was $5,490,000 (in 2017) for a single person and again doubled for a married couple. Even at that level, still did not affect the vast majority of folks. There are 21 states that have an estate or inheritance tax; Michigan is not one of them.
The TCJA incentivizes businesses to be pass through entities, but the rules are very complicated and until it’s had more time to be clarified, it will eliminate some loopholes and create many more.
If you’re an individual, it’s a great time to consult your tax expert or financial advisor to help determine the effects for you and to decide if you should take actions to capitalize on the changes. If you’re a small business owner, the incentive is even greater. It’s well worth your time to evaluate your corporate structure (Sole Proprietorship, LLC, S Corp, C Corp. . .) with your tax or financial advisor to consider options, review potential deductions, etc, since the TCJA was directed primarily at businesses.
Telos Financial is proud to be Michigan’s financial advisor for millennials, Generation X, & young professionals. Telos currently serves clients of all ages across the country and is a fee based, holistic financial planning firm located in Plymouth, Michigan. Dennis LaVoy, CFP®, CLU® is an experienced advisor and uses his experience, knowledge, and expertise to help families and individuals as the financial advisor for Detroit, Ann Arbor, and across the great United States of America achieve their financial objectives.