Your Life, Simplified

The Tax Cuts & Jobs Act (TCJA) of 2017 (30:49)

May 2, 2018

At the end of 2017, President Trump approved the 2017 Tax Cuts & Jobs Act (TCJA). The new law includes some of the largest tax changes since 1986 in an effort to simplify the tax code. What does this mean for you and your 2018 filings? This podcast covers the biggest changes and their impact to taxpayers, how you should take advantage of the changes, and what you need to be thinking about now when it comes to deductions. Topics covered include:

  • Changes to tax rates/withholding tables
  • Changes to standard deductions/itemized deductions
  • Changes to child tax credit
  • Charitable giving strategies
  • Changes to how you use 529 plans
  • Changes to deducting interest from home equity lines of credit
  • Much more 

Transcript

Brian Leitner: Welcome to Your Life, Simplified. My name is Brian Leitner, and I’ll be the host of this podcast. Today we’re going to talk about the Tax Cuts and Job Act of 2017. Effective at the end of 2017, the president put in place this new Tax Cut and Jobs Act or TCJA if you want to sound really cool, and prior to doing this, the bill that came across the president’s desk was over 1,000 pages long. That’s in addition to the 75,000 pages that are already in the tax code and what came through with this bill was some of the largest changes that have taken place since 1986. Some of the changes that they made to the tax law were permanent while others were just temporary. The goal here was truly to simplify the tax code and stimulate the economy. So, some people win, some people lose. The question is, what do we do now? What do you do now? How do we take advantage of that? How do we move forward? What are the things that we should all be thinking about? So, to help us sort all this out, we have Rob Crigler from Mariner Wealth Advisors joining us today. Good morning, Rob, thanks for joining us. There’s obviously a lot to get through. Before we talk about taxes and all that fun stuff, perhaps you could spend maybe 60 seconds on your background.

Rob Crigler: Well, Brian, you gave me a lot of credit. I’d love to spend 60 seconds, but my life has been pretty conservative as a CPA. I like to read those thousand-page tax laws and probably fall asleep halfway through and not even halfway through. Kidding aside, 30-plus years in the tax world. I am a CPA licensed in New Jersey. I’ve been with Mariner now almost four years. And before that time, I worked with a super-regional firm in the New Jersey, New York and metro area here. We had over 100 partners and my focus was primarily tax. I cut my teeth doing tax returns by hand, believe it or not. We also grew into and through the computer age, which is really helped the tax professional kind of advance and keep up with all of these changes since 1986, or since the Reagan tax changes came through.

Rob: This is the largest tax act that we’ve seen. And I think with all of these changes and with all the complexities of tax returns, not just the individual world but the business world, and we’re finding that it’s really difficult for anyone to be an expert in any particular area. So, with my team here at Mariner, we have a group of individuals who cover anything from trust to state, gift, business returns, foundation returns, individuals, multi-state and a whole host of complex issues. So, with the tax software, we’re able to really get a handle on all of these changes and keep up with them. Otherwise, it would be almost impossible.

Brian: Yeah, that’s a great point. I know a lot of people talk about tax planning and what it is that they do. It generally is sort of an event. I think that’s how people think about it. And maybe whether that’s in April or the end of the year, but true tax planning, it really takes place throughout the entire year. And for you to work hand in hand with the advisors at Mariner Wealth, truly a unique offering. So thanks again for taking the time here. I do appreciate it. Let’s get down to it. Let’s talk about the Tax Cuts and Jobs Act. And I know we could spend hours talking about what this looks like, but rather than bore the majority of our listeners and so forth, let’s give them real, actionable ideas. But first, before we get into it, I’d mentioned that the government was truly trying to stimulate the economy and simplify the tax code. Did that happen? Did they accomplish that?

Rob: You know, the simplifying, I’m not sure exactly what they were trying to do or what happened. I think they were trying to soften some of the tax effects primarily for lower- to middle- income families and individuals and also to stimulate the economy by helping corporations and businesses either repatriate money from overseas or stimulate business and enterprise activity in the United States. So, I don’t know if there’s ever any way to simplify it as a CPA. I truly would love to see a postcard filing. It doesn’t take anything away from what we do because we do tax planning for individuals. We help them with their businesses, whether it’s succession planning and transitions or other things they have to consider. But I don’t know if there’s any way really to simplify it. I think what they’ve really done is tried to make it softer on most individuals in the United States.

Brian: Yeah. Well we’ll find out whether it’s truly going to stimulate the economy. Obviously, at the time of this taping and when the law went into account, there was certainly a bump in the stock market. The economy is doing well, but time will tell. If we look at the tax bill itself and some of the changes will really start with the federal tax rate system. I know ultimately they wanted it to go from seven to three. That didn’t necessarily happen, but maybe they talk to our listeners about the implications of the tax changes that were made from a federal tax perspective.

Rob: As you said, they tried to reduce it to three different tax rates, which they didn’t accomplish. But what they did accomplish was changing the lower end tax rates for individuals primarily, which affected all the withholding tables. And most people are expected to see something starting in the February-March time frame. In other words, more net income, more disposable income for the individuals. But it didn’t really do the job that was intended, and I think what that means is, I don’t think that they really reduced any of the higher rates enough that it’s going to make an impact on the higher earners. I think there will be reduction in tax rates, but it’s not going to be significant enough to make a difference. I don’t know if that answers your question, but I think the attempt was to reduce the number of actual tax rates, and that did not happen.

Brian: Yeah, that didn’t happen. I think from what I’ve seen, generally speaking, folks can expect to pay, anywhere between one to two percent less from a federal tax perspective with the changes to those brackets.

Rob: Yeah, I would agree. The top rate was at 39.6 percent. It’s now down to 37 percent. But it’s mostly the brackets in the middle of the range where the change was really made.

Brian: And then, so moving from the federal tax perspective, or at least from an income perspective, talk a little a little about capital gains and qualified dividends. Any changes there?

Rob: There weren’t, and we were a little surprised to see that. In fact, the rates stayed the same, 15 and 20 percent. And, in fact, there’s still the additional tax, the 3.8 percent plus the 0.9 percent, which could bring that top rate, that top corporate rate up to 24 plus percent, and that effect isn’t going to help stimulate much of the economy, which is really where I think, there would have been some benefit if that had happened.

Brian: And those extra taxes are the net investment income tax as well as the additional serf tax on Medicare, which President Obama put in place a few years back. So, when you add it up, that is an additional tax from that perspective. No changes in the actual tax law on either of those two items. The next topic that a lot of people are talking about is the standard deduction and how everyone’s going take the standard deduction now because you can’t write anything off and all those good things. And can you bring a little bit of clarity on what the standard deduction looks like now.

Rob: Absolutely. They’ve increased it for married filing jointly to $24,000, individuals are at $12,000. And by increasing that, they’ve eliminated some of the itemized deductions. It appears that most people might fall into that standard deduction, as opposed to taking the itemized deductions as they had in the past. Limitations on those itemized deductions are, for instance, what they call salt, state and local taxes. A state and local income taxes include property taxes as well. That’s limited at $10,000 in the past. There was no limitation on those taxes except through AMT, which we will probably talk about later, I imagine.

Brian: And Rob, so I understand the personal exemptions have been eliminated. What are the challenges now? What can we work through here?

Rob: That could end up hurting any filers with dependents. But what they’ve done is doubled the child tax credit from $1,000 to $2,000. And in doing so, actually it’s for children under the age of 17, you just have to report Social Security numbers. And you’ll get that child tax credit there. They’ve also increased it to $1,400, a refundable credit, which is different than before, but by eliminating that personal exemption, that is going to hurt any filers with dependents. So, they’ve increased the standard deduction to make up for some of that.

Brian: So, folks who are taking that deduction with children, they’ll lose that, but they will gain the increase in the childcare tax credits if I heard you correctly? So, one of the other things they’ve changed here is the standard deduction, as well as changes in itemized deductions. Can you talk a little bit about those changes?

Rob: Absolutely. The standard deduction is now at a $24,000 for joint filers, $12,000 for individual filers. And what they’ve done is really made some significant changes in the itemized deductions. One in particular is with the state and local income tax and property tax deduction. They’ve limited that to $10,000. That’s affectionately referred to as salt, or state and local tax deduction. By doing that really there’s a–I’ll tell you the top 10 states–New York, New Jersey, Connecticut are the top three. California, Maryland, Oregon and believe it or not, D.C., Massachusetts are all up there. Six out of the top 10 are in the northeast. But those, that $10,000 limitation, will affect filers in all of those states, because it’s both income tax and property tax.

Brian: So, Rob, obviously we have clients across the country, and to your point, whether it’s in the northeast or the opposite side of the coast and some places in between, property taxes and state and local taxes, these are well in excess of $10,000 for a lot of the folks who we speak with. So, this is going to, from a tax perspective, hurt them in a major way. Is there anything that can be done in this sense? Is there any planning around this?

Rob: It’s interesting to consider really talking to your investment advisor about making a possible investment in a tax-free state, tax-free investments to eliminate or reduce any state tax and income tax. Property taxes, there is always the opportunity for, but that’s not always easy to accomplish. We’re finding that a lot of people, particularly in New Jersey, are going to relocate, some close to retirement. This may force them to make a decision well in advance of retirement. But it’s a conversation that we’re having with all of our clients. We’re inviting them in to sit down, typically right after their 2017 tax returns are prepared and filed. We’ve made appointments already to sit with the clients to review where they are, what the state income tax implications are, what the limitations are for them.

Brian: Yeah, that’s no doubt important. From a mortgage perspective or mortgage interest deduction, people joke all the time, I have to buy a place, so I have something to write off because I want to be able to write off my mortgage. Or I have a loan that I want to take as a deduction, so I’m going to have a line of credit. Talk to us a little bit about the changes that have been made on that side.

Rob: Yeah, that’s an interesting question. It’s a little confusing for some. What’s happened is they have grandfathered existing loans and a home acquisition or debt incurred after December 15th of 2017, so actually last year. Anything purchased after or incurred after that date is limited to $750,000 of principle balance. So what does that mean? It means that if your mortgage is $1 million, and of the interest that you pay, only two or three quarters of that interest is deductible.

Brian: So, Rob, if I heard you correctly, in terms of taking the deduction on mortgages going forward, you’re limited to the mortgage value being worth $750,000. So, you can still deduct up to that? And that’s for new loans as opposed to existing. So folks that have had their mortgage for years, they’re grandfathered if they’ve had these in the past. And then as a relates to lines of credit, sometimes they’re referred to as HELOCs or, depending upon your lending institution, what changes have been made there?

Rob: Well, they’re were focused more on, “What is the money used for?” So, home equity interest is only deductible if the home equity loan was used for improvements on the house or original acquisition debt. So, they’re really focused now on, “Where is that money being spent?”

Brian: So, I know I bought a car about three years ago and rather than work with the dealership and take a loan out through the dealership, I ended up using a HELOC, because I wanted to be able to deduct that. My tax consultant told me that was the right thing to do. You get additional benefits of doing that, but today that loan would not be deductible. That’s right?

Rob: That’s correct. And a lot of times we would advise clients, as far as student debt or tuition debt, to use a home equity loan for that. If it’s a short-term loan, depending on what the money was used for in the past, it was either deductible or not. But currently, you’re not allowed to deduct it unless it’s used for improvements on the existing home or original acquisition.

Brian: It’s interesting. So, in my example, I will no longer be able to write that off, which is too bad. And going forward, it’s almost an easier conversation to have because it’s an apples to apples comparison. If you are purchasing something like a car, now it’s, “Where am I going to get the best rate?” as opposed to, “How do I take in the tax deductions?” Take that into account.

Rob: Exactly. There’re a few other itemized deductions that have been adjusted or changed. We should probably address as well. One is the charitable contributions. They’re still allowed, but they’ve actually been increased for cash contributions from 50 percent to 60 percent of adjusted gross income. And it is a temporary change. It phases out after 2025, but it’s something to consider, and it’s also something to plan for. There are donor advised fund considerations you can make, and we’ll get into some tax planning tips at the end, I imagine. But I wanted to talk about that charitable contribution change.

Brian: What are their itemized deductions should we be addressing on this?

Rob: Another one that a lot of individuals use is miscellaneous itemized deductions, and that includes investment management and consulting fees, tax preparation fees, any unreimbursed employee expenses and certain hobby expenses. It is a temporary change. It starts in 2018, and goes until 2025, but they have been eliminated. It used to be that you could deduct anything over 2 percent of your adjusted gross income, and that’s no longer allowed. Something that we consider, regarding the charitable contribution change, is bunching charitable contributions. Some people will be making multiple contributions or larger contributions to the same charities in one year and not as much in the second or third year. Something else to consider is making an upfront contribution to a donor advised fund. You should talk to your advisor about that. You’ll get the deduction in the one year, but the money doesn’t need to get out to the charities until subsequent years. But you get that upfront deduction.

Brian: Yeah, I know there’s a lot of talk about the fact that charities are going to suffer now because of the limitation. So, there is a limitation that’s in place, but there are strategies to work around that from a tax perspective. I also truly believe that people give because they want to support a cause, not just simply to receive a tax break. So, from a medical perspective, again, there’s been some changes on the medical deduction as well.

Rob: The medical expense deduction has been reduced to 7.5 percent of your adjusted gross income for both 2017 and 2018, but starting in 2019, it reverts back to 10 percent of your adjusted gross income. And that’s temporary until 2025.

Brian: So, to be clear for 2017 and 2018, when we say we’ve reduced that, we’ve reduced the floor meaning, it increases the amount of deduction that you may be able to take. So, it’s a positive.

Rob: Absolutely. That’s correct.

Brian: And alimony. Alimony at this point?

Rob: Alimony is a funny one. The payor, making that alimony payment, used to take an above the line deduction for that, and the person receiving the alimony would have to pay tax on that. They’ve eliminated that entirely. So, the new rules for the treatment of alimony are effective starting December 31, 2018, which is interesting because it’s only after 2018 that this rule comes into play. And the deduction is eliminated entirely.

Brian: So, divorce just became even more painful. But before we move into estate taxes, just maybe another comment on 529 plans. They’ve made those a little bit more flexible today. So, 529 is the savings plans named after a section of the tax code. Do you want to comment on any of the changes made there?

Rob: Yeah, there’s a really interesting one. The 529 account holders now can use up to $10,000 per year for tuition for elementary or secondary public, private or religious schools. It used to be that it was only for higher education, for full-time students. But now it can be used at almost every level of education.

Brian: So those plans are even more valuable at this point. That’s terrific. The cost of school, whether it be private or public, continues to get more expensive every year, as we all know. So, estate taxes are an additional tax that may be leveraged when passing assets whether that is in the form of gift tax or state tax. And there’s an exemption associated with that, and they just increased that. Can you talk a little bit about that?

Rob: Certainly. The lifetime estate exemption is now doubled. Previously it was at $5.6 million for individuals. It’s now gone to $11.2 million for individuals and $22.4 for married couples. In addition, the annual gift exclusions increased from $14,000 in 2017 to $15,000 in 2018.

Brian: And Rob, I know there’s confusion around the annual gift exclusion. So just to be clear, that means I can personally give you $15,000. I can give my parents $15,000. I can effectively give whoever I want, with no limit, $15,000, and I can double that amount because I’m married and do what they call gifts splitting. Is that accurate?

Rob: That’s correct. And in fact, I’d love it if you gave me $15,000, but you can give to any individual, that’s correct. You can give any individual up to $15,000 without filing a gift tax return. It doesn’t mean that anything over $15,000 becomes taxable as long as you have a lifetime exemption remaining.

Brian: Meaning that you haven’t used that up through a different planning technique or strategy. Is that accurate? So, I know sometimes we talk about the estate tax, and there are a lot of folks out there that might say, I don’t have an estate tax issue. Maybe I wish I had that type of problem. But just to make sure that we hit this, it’s absolutely critical that everyone has an estate plan, whether you have an estate tax situation or not. So, it’s very important to make sure that you have wills documented, maybe that you have some sort of revocable trust that you have powers of attorney in place, healthcare proxies in place. So again, from an estate planning perspective, and the last thing we advise all our clients to have is a HIPPA document. So effectively what that means is it enables the doctors to share information, should something happen, to you or a loved one.

Brian: And what’s really interesting is if you have children who are going off to school, have a HIPPA document on them. If something should happen to your child and you go up to the university to go see them, and he or she is in the hospital, and you’re asking the doctor questions, if they’re over legal age in that state, that doctor cannot share that information with you. So, it’s just another thing to think about as you think about your entire estate planning and financial picture. Rob, there were significant tax cuts for those that own businesses or certain types of businesses. Who benefits from some of these tax cuts at this point?

Rob: Well, I have to be honest, that’s one of the most complex areas where changes have been made. And what is effectively happening is there could be potentially a 20 percent deduction against qualified business income. The definition of qualified business income is actually extensive. It does eliminate attorneys and accountants, which was surprising to most of us. But there are certain service businesses that are also affected. That’s an area that you should talk to your tax advisor about. If you have pass through income, you could be affected. It could be an effective planning tool if you own your own business and are thinking about changes in that structure.

Brian: So, Rob, the changes that were made from a business owner perspective, whether it relates to C Corps or pass-through entities, what are some of the changes that have just been made?

Rob: Well, the C Corp top rate has been reduced from 35 percent to 21 percent. That’s going to affect a lot of the larger corporations that are paying dividends out, to say, publicly owned companies paying dividends out to individuals. But the smaller business entities, which are considered typically pass-through entities, there is the opportunity for the 20 percent deduction against qualified income. Those are clearly defined. There are a number that are not allowed. But it’s a complex issue that typically we recommend sitting down with your tax advisor to talk about planning in that regard.

Brian: Yeah, it would be foolish to change the entity structure of your business just to save on taxes. That needs to be looked at as more of a holistic idea or transition if that was going to happen. Correct?

Rob: Absolutely. There’s other consideration too with the business entity. The expensing of qualified property now, which is really depreciation, there is 100 percent allowance from 2017, and it actually starts mid-year 2017 through 2023. So, there’s some consideration there, and in the future years it’s reduced from 80, 60, 40 to 20 percent through 2026.

Brian: Wow. There’s a lot of information on this podcast. Just to let folks know at Mariner Wealth Advisors, we did a white paper, and this is available on our website at marinerwealthadvisors.com. Rob, before we let you go, maybe just a couple of actionable ideas that you can share with our listeners so they can take some of this information and do something with it.

Rob: Certainly, we mentioned a few throughout the podcast but just to recap, bunching charitable contributions, that’s something to seriously consider or a donor advised fund. Your investment advisor at Mariner can help you out with that. Talk to your tax professional at Mariner about the 20 percent deduction against qualified business income. If you have a pass-through entity, think about paying off your home equity loan (if it’s not used for either acquisition of the primary residence or improvements on that), and also consider your investments and whether they are taxable by your state for income tax purposes, because your income tax deduction now is limited. You should absolutely sit down with your tax advisor to review 2017 taxes and make sure that you’re planning carefully for 2018.

Brian: Rob, thank you. There is obviously a great deal of information out there. Trying to understand some of this in one podcast, we all know is somewhat difficult, and our goal wasn’t to take a deep dive and tell everyone everything about some of the changes, but this conversation has been incredibly helpful. So, thank you very much. But before I let you go, we ask all of our guests one question, and that one final question is, what is the worst financial decision you have ever made?

Rob: Oh my goodness. I have so many of them, and I appreciate your time. The worst financial decision I’ve ever made was getting into business with a very close friend of mine. Not because he was a very close friend, but we didn’t define what our roles were. I didn’t sit down with someone in advance of setting up that partnership, which I should have done. I thought I knew how to do it and, by doing so, he and I have never spoken again, and we lost a whole bunch of money on it. So, what I typically recommend to any of my clients or anyone I talk to about setting up a business entity, is make sure you’ve clearly defined what it is that each person is supposed to do in that relationship. And also talk about the finances. Make sure you understand who is to contribute when and who should participate through service.

Brian: That’s great. Rob, I’m sorry that happened. I’m sorry you lost money as well as a friend throughout that deal. But maybe we can learn from your mistake. Appreciate it. So, as we discussed earlier, some of the changes were temporary and some are permanent, and let’s go through that list. So for some of the temporary changes, they’re expiring after December 31 of 2025. And these are: the individual income tax brackets; the standard deduction increase; the alternative minimum tax exemption and phase-outs; the expanded child tax credits; estate tax exclusion; the 20 percent deduction for qualified business income and all itemized deductions, except those that are medical. So, the medical expenses and the changes made there actually expired on December 31 of 2018. The changes that were made permanent was the corporate tax rate, the changes made to the 1031 exchange and the alimony deduction repeal.

Brian: So, while some of these changes are permanent and some of these changes are temporary, I think we all know there is nothing permanent as it relates to taxes. The tax law is going to change based upon who’s in power, and it’s really important to be mindful and planful. So, maintaining flexibility is critical. For a complete breakdown on what is permanent versus what is temporary, please visit us on our website at marinerwealthadvisors.com/podcast. A message to our listeners, if you have a question, something you would like to ask or a topic for a future podcast, please go ahead and email us at podcast@marinerwealthadvisors.com. We know that your time is incredibly valuable, and we hope you find this podcast a worthwhile investment of your time. Thank you for listening.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon.

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