Tax Cuts and Jobs Act (TCJA)

January 24, 2018

The Tax Cuts and Jobs Act is a pro-growth tax plan that reforms both individual and corporate income taxes. This brief summary highlights certain provisions that may impact your clients.

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%
Standard Deduction2

Married Filing Jointly: $12,700
Single: $6,350
Head of Household: $9,350

Married Filing Jointly: $24,000
Single: $12,000
Head of Household: $18,000

Corporate Rate 35% maximum rate
21% flat rate
Qualified Business Income Same as individual rates
20% deduction3
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

$5.49M individual
$10.98M married couple

$11.2M individual
$22.4M married couple

 

Other Provisions for Individuals

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).

  • Investment advisory fees will no longer be deductible.
  • Although the individual mandate for the Affordable Care Act was repealed, the Net Investment Income Tax (NIIT) of 3.8% was not repealed.

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.

 

Provision for Business

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.
 

On a Positive Note

The TCJA made only a few changes that impact retirement planning.

  • Contribution limits for retirement plans are unaffected, and the importance of timing when one receives income will definitely reignite interest in the discussion around the tax-deferred growth annuities receive.  
  • The inherited IRA, Roth IRA, and nonqualified stretch death distribution option remains unchanged. This allows spousal and non-spousal beneficiaries to stretch death distributions over their single life expectancies.
  • The ability to recharacterize Roth IRA conversions was eliminated, although the backdoor Roth IRA strategy is still possible. Individuals with no existing IRA account assets (i.e., traditional IRAs, SEP-IRAs, and SIMPLE IRAs) may consider contributing to a nondeductible IRA, then immediately converting it to a Roth IRA. Assuming the conversion is done immediately, there should be little to no earnings that will result in tax liability to the individual. If there are no gains in the traditional IRA, the client is essentially doing a "tax-free conversion" because all the monies being converted are post-tax (since the IRA contribution was not deducted on the client's taxes). If a small gain accrues before the conversion, some taxes may then be due.
  • Qualified charitable distributions (QCDs) may be more attractive as fewer people will be able to itemize deductions. QCDs allow individuals who are age 70½ or older to distribute up to $100,000 from their IRAs (other than ongoing SEP-IRAs or SIMPLE IRAs) directly to qualified charities without having to include the distribution(s) in gross income. QCDs that are not includable in gross income will not be eligible for a charitable deduction. In addition, the value of the distribution counts toward the IRA owner’s required minimum distribution (RMD).
  • Tax-free distributions from 529 plan accounts can now be used for qualified expenses for elementary and secondary schools at public, private, or religious institutions. Individuals can now take up to $10,000 in distributions annually from their 529 plan accounts to pay for kindergarten through 12th grade tuition and books.

     

Final Thoughts

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, ext. 3939, or send an email to RSG@PacificLife.com.

 

1Corporate tax law changes are permanent.
2
Personal exemptions have been repealed.
3
Not all pass-through income is eligible for the deduction.

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Steve is a Senior Retirement Strategies Consultant with the Retirement Solutions Division at Pacific Life. He brings more than 25 years of industry experience in financial planning and wealth management, including detailed knowledge of both employer-sponsored retirement plans and retirement-planning strategies.

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