Importance of Overall Tax Planning

The “Tax Cuts and Jobs Act of 2017” presents some of the most sweeping changes made to the Internal Revenue Code since 1986.  Reduction of overall tax rates, elimination of personal exemptions and many itemized deductions, as well as a massive increase in the federal estate tax exemption has created a world of tax uncertainty for many people and an opportunity for us, as advisors to craft new strategies for our wealth management clients.

Positives emanating from the new law include overall lower individual and corporate income tax rates, doubling of the standard deduction, real relief for small retail and manufacturing businesses organized as partnerships, LLC’s or S Corporations and substantive relief from estate taxes for nearly every American family by doubling the exemption to roughly $11 million per person.  Section 529 education plan funds can now be used for elementary and secondary private school expenses (limit of $10,000 per year per child).  The Alternative Minimum Tax (AMT) has also been reformed with a higher exemption and a higher threshold for phaseout of the AMT.

Negatives include elimination of all miscellaneous itemized deductions such as tax preparation and investment management fees, limiting deductibility of state income/property taxes to an aggregate total of $10,000, elimination of the personal exemptions (roughly $4,050 per person), a slight reduction in the amount of deductible mortgage interest for those who have more than $750,000 of mortgage debt and elimination of new home equity line of credit interest unless funds are used to purchase or improve a residence.

Deductibility of medical expenses and charitable contributions is largely unchanged.  Deductibility of alimony paid and taxability of alimony received is eliminated for agreements beginning in 2019 or substantially modified in 2019.  The provision allowing charitable distributions (up to $100,000 per year) to be made directly to a qualified charity has been made permanent.  You don’t report the income on your federal return and you don’t receive a charitable deduction.  North Carolina treats this transaction very differently, so consult with your tax advisor before making charitable gifts from your IRA.

What does this all mean for our clients?  In many cases, the loss of deductions and exemptions will be offset by the lower tax brackets.  Clients who are on the threshold of being able to itemize deductions will need to take a close look at “bunching deductions” and potentially making “double-sized” charitable contributions every other year in order to gain the full deductibility of those gifts.  Clients who previously were exposed to the federal estate tax, will now need to review their estate plans and can possibly simplify their planning documents.  Because of the higher estate tax exemption, clients with charitable gifts designated in their estate plan, may wish to make some of those gifts now and take the income tax deduction.

In conjunction with your tax and legal consultants (on whom you should rely for tax and legal advice) the Altavista advisors are ready to help you and your family navigate this new tax landscape.  A significant part of our time spent with clients will involve a discussion of how these changes will affect your long-term wealth management plan.  As always, please feel free to call or email with questions that arise between our regularly scheduled meetings.

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