Tax Cuts and Jobs Act of 2017: Ten Huge Take-Aways

Posted on by in Current Events, Economy, Home Buyer, Income Tax, Market News, Tax Law and tagged , , , , .

Ten Huge Take-Aways from the Tax Cuts and Jobs Act by Jim Lange

 

Ten Huge Take-Aways from the Tax Cuts and Jobs Act of 2017

by James Lange, CPA/Attorney

The first thing to consider about the proposed Tax Cuts and Jobs Act is that it is just a proposed tax bill.  It is possible it will face stiff resistance in the Senate and possibly get no votes from the Republicans.  Jeff Flake, John McCain, Bob Corker, and Lisa Murkowski might be on that list of Republican “no” votes. So, like health care it is possible, and even likely, that nothing will happen this year and maybe not in the foreseeable future.

Depending on your personal circumstances, the Tax Cuts and Jobs Act of 2017 could be good or bad for your family.  Critical factors like how many children you have, whether you live in a high-tax state and itemize your deductions or take the standard deduction, whether you own a home or are looking to buy one could sway you from benefiting from these changes or suffering from them.

In fact, there are so many variables to consider that it is difficult to make a blanket statement that the proposal will offer you tax relief.  Corporate America is a clear winner. Reducing the corporate tax rate from 35 to 20 percent, Speaker Paul Ryan argues, will create more jobs and drive up wages.  But critics, even Republican critics, say it is not a given that companies will pass their savings on to workers vs. shareholders through higher dividends.

However, the bill as it stands now is far from becoming law.  Ultimately, the Senate will introduce more changes and what we will end up with and whether it will pass are still great unknowns.  But, going forward it will still be helpful to understand some of the main provisions the bill advances so you can begin to assess the impact on you and your family.

Champions and underdogs in the Tax Cuts & Jobs Act of 2017:

  1. This doesn’t appear to be an overall tax-cut for the middle class, as promised. What we see in this bill is a tax cut for some, and a tax hike for others.  As usual, it all depends on how much you make, how you earn your living, where you live, the mortgage on your home, your property taxes, student loans, etc.  The Tax Policy Center commented that the bill wasn’t really tax reform but rather it was more of a complicated tax cut.  We have compared differences for different hypothetical clients and the results were less dramatic than we thought.  In one case, the elimination of the alternative minimum tax was helpful, but the dis-allowance of state and local income taxes netted out to a tax increase for one client.
  2. The bill reduces the number of tax brackets from seven to four. Currently the brackets are 10-15-20-28-33-35-39.6%.  Under the new provisions there will be a zero bracket (in the form of an enhanced standard deduction according to the bill), and from there the brackets will be 12-25-35-36.9%.  Here is how they break down:
2017 Single Filer2017 Married Filing Jointly2017 Head of Household
$0- $9,325 – 10%$0-18,650 – 10%$0- $13,350 – 10%
$9,326- $37,950 – 15%$18,651- $75,900 – 15%$13,351- $50,800 – 15%
$37,951- $91,900 – 25%$75,901- $153,100 – 25%$50,801- $131,200 – 25%
$91,901- $191,650 – 28%$153,101- $233,350 – 28%$131,201- $212,500 – 28%
$191,651- $416,700 – 33%$233,351- $416,700 – 33%$212,501- $416,700 – 33%
$416,701-$418,400 – 35%$416,701- $470,700 – 35%$416,701- $444,550 – 35%
$418,401 + – 39.6%$470,701+ – 39.6%$444,551 + – 39.6%

 

Proposed Single Filer Proposed Married Filing JointlyProposed Head of Household
$0-$44,999 – 12%$0-$89,999 – 12%$0-$67,499 – 12%
$45,000-$199,999 – 25%$90,000-$259,999 – 25%$67,500-$229,999 – 25%
$200,000-$499,999 – 35%$260,000-$999,999 – 35%$230,000-$499,999 – 35%
$500,000+ – 39.6%$1,000,000+ – 39.6%$500,000+ – 39.6%

Additionally, the bill would eliminate the alternative minimum tax (AMT), a second tax calculation for people earning about $130,000 which reduces the impact of many tax breaks.

  1. The bill doubles the current standard deduction, giving $12,000 to single filers, $24,000 for married filing jointly, and $18,000 for heads of household.
  1. But before you get too excited about a larger deduction, they’ve decided to repeal the personal exemption—currently $4,050 per person—and the deductions for state and local taxes. So, it isn’t as much of a break as you think it is.
  1. They are taking away one of our favorite, and edgiest strategies. No more recharacterization of Roth IRAs. If you’ve heard me talk about Roth IRAs, you’ve probably heard me mention recharacterization.  The ability to recharacterize, basically undo the Roth conversion, adds enormous flexibility in our Roth IRA conversion planning.  This will mean that the days of do-it-yourself Roth IRA conversion calculations will be highly risky.  Having a professional you can trust, who knows the system in and out, and who has the experience to get it right will become incredibly important.
  1. Taxpayers with a net worth of $10 million or more (and their children) have a reason to cheer as the plan almost doubles the current federal estate tax exemption from $5,490,000 to $10,000,000 per individual, with spouses exempt from any limits. The Joint Committee on Taxation has commented that this provision, while being a boon for business owners and wealthier Americans will reduce the federal revenue by around $172 billion over 2018-2027.  Oh, yeah…and after 2023, the estate tax will be repealed all together.  Compensating for that loss of revenue is a huge stumbling block for the proposed tax reform.  Though hard to confirm, rumor has it that originally they were going to eliminate the estate tax entirely but put this provision in to secure the support of Alaska.
  1. While the bill does simplify many areas, it also complicates many areas. It is not a major tax simplification.  I do not fear that our CPA firm will lose business because clients will find it so easy to complete their tax returns.
  1. While corporations and businesses will see a reduced corporate tax rate—from 35% to 20% – it will come with a price¾a much more involved and complicated filing process. New anti-abuse rules, complicated multi-national corporation rules, new tax treatments on interest, and changes in international income rules will make navigating your business tax return much more difficult.  Shareholders of pass through entities, like Subchapter S corporations will get a big break, but the complications for claiming that break are considerable.
  1. The Act is silent on the Death of the Stretch IRA. We still aren’t sure if and when this will happen.  It is very possible that they are holding it in reserve to for future negotiations pertaining to reducing the deficit.  The tax cuts in this bill will massively reduce federal revenue.  We’re talking in the trillions of dollars here.  To get any version of this to pass, it is very likely that the GOP will have to come up with ways to offset some of the deficit.  Killing the ability to stretch IRAs and retirement plans for generations is one way to do that.
  1. Even the Republican’s admit that this bill will increase the deficit by $1.5 trillion dollars over the next ten years, and that is a huge issue. Critics on both sides see increasing the deficit as unacceptable.  Further, the Tax Policy Center and other tax policy commentators on both sides of the aisle think that this estimate is too low or too high, and many do not believe that this bill will provide the economic growth or tax-relief promised to the middle class.

If you want to read an excellent 82-page summary of the bill, check out The Fiscal Times online:

http://www.thefiscaltimes.com/2017/11/02/Read-House-GOPs-Tax-Bill-or-Summary-Key-Points

If you are looking for more of a brief overview summary, these are excellent resources:

https://taxfoundation.org/details-tax-cuts-jobs-act/

http://www.taxpolicycenter.org/taxvox/house-gop-tax-bill-mostly-business-tax-cut-will-create-new-winners-and-losers

As I mentioned above, this bill is simply the first iteration of what the final bill might look like, and it isn’t clear that anything in it is going to become law.  But it bears some scrutiny since some of the main points are likely to provoke debates.  We will continue to watch as the process evolves.  We might even have to interrupt our series on Lange’s Cascading Beneficiary Plan once again!  If that happens, I hope you will bear with us.  But unless there is major news, we will see you next week as we continue exploring the advantages of the LCBP

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

Tax Free Roth IRAs: Don’t Believe Everything You Read

Posted on by in IRAs, Retirement Planning, Roth IRA, Roth IRA Conversions, Tax Law and tagged , , , , , , , , , .

Tax Free Roth IRA, Don't Believe Everything You Read, James Lange, The Lange Financial GroupMy wife recently told me that she didn’t think that there was anything that could keep me from blogging about my upcoming book, Retire Secure!  While she was joking, she was also right, I thought. But then, an article that was published in US News and World Report yesterday (April 20, 2015) was inaccurate on so many points that I could not let it go without commenting on it. I submitted a comment to the article and asked that the article be retracted. I can only hope that the magazine will publish a retraction, and quickly, before an unsuspecting reader takes the writer’s recommendations to heart.

The writer is a certified financial planner and registered investment advisor, as well as a published author, from Virginia. He begins by telling readers about Roth IRAs. He says that you can contribute $5,000 to a Roth IRA – that limit was increased $5,500 in 2013. If you have a Roth account in your 401(k), he claims you can add $6,000 to it if you are over 50 years old. (If you are over 50, you can add $24,000 to a Roth 401(k) in 2015 – this is made up of the $18,000 basic contribution limit plus a $6,000 “catch-up” contribution limit.) He claims that, if you contribute to a Roth, “the money you invest will be taxed”. (Everyone knows that, if you follow the rules, Roth accounts aren’t taxable, right? I sincerely hope that what he was trying to say was that there is no tax deduction for Roth contributions!) Then he tells readers that, after age 59 ½, “when you begin to take distributions” from the Roth, they will be tax-free”. That statement is not inaccurate, but it does omit the very important fact that your contributions can be withdrawn from a tax free Roth IRA before age 59 1/2.  (Earnings on your contributions are treated differently.) It is the traditional IRA that, in most cases, you cannot withdraw from without penalty until age 59 1/2.

The worst advice, though, came when he tried to present the pros and cons of Roth conversions.

He recommends that you take one of your existing IRAs or qualified plans and convert the entire thing to a Roth, but then warns you that you will need to pay tax on that entire conversion at once.What is omitted here is that, if you convert your entire account at once, your tax bill may be so large that you move up in to a higher tax bracket. It would be imprudent to make such a recommendation to a client! What generally makes more sense is to make several smaller conversions, in amounts that ensure that you stay in the same tax bracket. He recommends not making tax free Roth IRA conversions later in life, on the basis that you will not live long enough to enjoy the tax-free benefits. Tongue in cheek, I might argue that that’s a risk at any age, but even if you don’t live long enough to enjoy them, the tax-free benefits to your heirs, who are likely much younger than you, are indisputable. The strangest statement against Roth conversions, I thought, was that “you will potentially have to write a big check to the IRS”. It is true that you will have to pay tax on any amount converted from a traditional to a Roth IRA. But even if you don’t need your retirement money to live on, you will have to start taking withdrawals from your traditional IRAs every year once you turn age 70 ½. Those mandatory withdrawals will be taxable, and at that point you will be writing a big check to the IRS. The question is, does it make more sense to make Roth conversions while your retirement account balance is likely to be smaller, pay tax on a smaller amount of money, and generate tax-free income on all of the future earnings on the converted amount? Or, does it make more sense to wait twenty or thirty years, let the taxable traditional IRA grow as large as possible, and then pay the tax on the larger mandatory withdrawals?

In this age of electronic communications it’s easier to offer opposing points of view, and I have to admit that I wasn’t surprised when I saw the sheer volume of dissenting opinions that the article produced within hours of its publication. I also wondered if there were other individuals who read it and took the advice to heart. That made me think of another question – what would my readers have thought about that article, especially after receiving such dramatically different advice from me? Who are you supposed to trust?

My advice to you is this – trust yourself first. If a financial professional says something that does not make sense to you, ask for clarification. If the answer you are given still doesn’t make sense to you, trust your instincts. Get a second, third, fourth or fifth opinion before you act. Or, look up the answer yourself. There are number of resources that my staff and I use all the time, that are also available to you.   These include the Internal Revenue Service’s website (www.irs.gov), the Social Secure Administration’s website (www.ssa.gov), and the website established by Medicare (www.medicare.gov). Educating yourself about your options is the best defense against making a potential mistake that you have available to you.

I’ll get off my soapbox now. Stop back soon for another update on my book.

Jim

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