On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). Provisions of the bill relating to individuals are temporary (i.e., sunsetting in eight years after 2025),1 and according to many experts, this will be the most sweeping change to the U.S. tax code since 1986.
The Tax Cuts and Jobs Act is a pro-growth tax plan that reforms both individual and corporate income taxes. Here is a brief summary that highlights certain provisions that may impact individuals and businesses.
|Prior Law (2017)
||Tax Cuts and Jobs Acts (2018)
|Individual Rates||10, 15, 25, 28, 33, 39.6%||10, 12, 22, 24, 32, 35, 37%|
Married Filing Jointly: $12,700
Married Filing Jointly: $24,000
|Corporate Rate||35% maximum rate
||21% flat rate|
|Qualified Business Income||Same as individual rates
|State and Local Taxes||Deductible||Maximum $10,000 deduction|
|Mortgage Interest||$1 million limit||$750,000 limit|
|Alternative Minimum Tax||Individual Rates: 26% & 28%||Individual Rates: Exemption level increased|
|Federal Estate-Tax Exemption
Another provision that may impact individuals is the elimination of the deduction for personal exemptions and the repeal of miscellaneous itemized deductions, subject to the 2% floor of adjusted gross income (AGI).
In addition, the kiddie tax continues to apply to unearned income above $2,100 received by a child younger than age 19 or a full-time student younger than age 24. However, the tax is now calculated using the tax brackets for estates and trusts rather than the parents' tax bracket. The estates and trusts bracket is very compressed and hits the top bracket of 37% to income that exceeds $12,500. Unearned income is income from sources other than wages and salary, such as dividends and interest. Young IRA beneficiaries will be impacted, and the TCJA also may impact the IRA owner's decision to name a trust as beneficiary of the IRA.
One provision, highlighted above, that will generate a great deal of conversation is the section 199A deduction, which will allow owners of certain pass-through businesses (including sole proprietorships, partnerships, limited liability companies, and S corporations) a deduction of up to 20% of qualified business income subject to certain limits. Financial services is one of the specified businesses for which this deduction would be limited based on the level of income.
The TCJA made only a few changes that impact retirement planning.
There may be some unforeseen and unintended consequences from the bill that may arise, necessitating Congress to revisit specific provisions through "technical" corrections during 2018 and potentially beyond. Stay tuned.
For answers to questions regarding the Tax Cuts and Jobs Act (TCJA), contact the Pacific Life Retirement Strategies Group at (800) 722-2333 or send an email to RSG@PacificLife.com.
1Corporate tax law changes are permanent.
2Personal exemptions have been repealed.
3Not all pass-through income is eligible for the deduction.
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