The new tax bill, which will spark numerous changes to business and personal taxes, is set to be finalized by the end of 2017. This new tax bill will impact our financial preparations, including retirement planning. By learning about these changes, we can understand the actions we need to take before year-end.
Corporations are set to receive big tax-rate reductions from 35 percent to 21 percent although it is not yet a certainty; what is certain is that their tax rate will be reduced significantly. Additionally, business owners will receive incentives to invest, since they will have five years’ worth of investment write-offs for 100 percent of investments. Pass-through businesses will receive a 20 percent income deduction, which will bring their taxable income down to 80 percent before it moves to the personal side.
A significant concern for individual taxes is that the new tax bill will limit property taxes and State, Local, and Property taxes will cap at $10,000. The changes are not yet final, as the effect of the bill is not yet known for high tax states. One of the proposals in the new tax bill is to lower the top bracket from 39.6 percent to 37 percent. Withholding taxes from salaries in January will still likely be based on 2017 rates and will have to be adjusted once the information is released. We will lose personal exemptions, but standard deductions will be doubled, independent of property taxes, contributions, medical expenses, etc. Itemized deductions will increase to $12,000 for individuals and $24,000 for families, while the child tax credit will increase from $1000 to $2000.
The new tax is also likely to affect mortgage deductions. New homebuyers will only be able to deduct interest on the first $750,000 of mortgage debt on a newly-purchased home. Currently, the mortgage deduction is set at $1 million. The new deduction will affect homes purchased after November 2017, when the bill was first proposed. Anyone buying a new home may not be able to deduct the full amount of their mortgage. We can’t be sure of how these changes will impact property values, especially in high-tax states like California, New York, and New Jersey. Come April, it’s possible that homeowners from these states will see a surge in what they owe.
It’s possible then, that homeowners from high-tax states will be more likely to put their homes up for sale, but buyers may be hesitant to purchase as a result of this decrease in mortgage deductions. There are other possible compromises that will happen with the new tax bill: graduate student deduction may be retained, and the new tax bill doesn’t include the FIFO mandate. We’ll see more as details come up this month.
What Moves Should I Make Before the End of the Year?
With so many changes in the new tax bill, it is best to contact your financial planner and or tax accountant to discuss the changes and next steps and may want to consider prepaying property taxes or for those who have medical costs, paying 10 percent of your adjusted gross income in medical costs will become a deduction all at once. Of course, deductions for medical have not been finalized so there is a potential for it to lower to around 7.5 percent.
You can also opt to give charitable contributions as much as you can. For those who have experienced casualty losses, you may want to deduct them in 2017. It is best to consult with your tax accountant to see which actions will be most suitable for you.
We will need to reevaluate our tax planning. There will be deductions, changes, and increases, which will affect your personal tax strategies going forward. Estate tax will likely remain, so include that in planning and discussions with your financial advisor.
Anyone who has investments, especially if they’re just starting out, may want to reconsider investment plans and plan according to what is more in line with current tax changes, in order to take advantage of low-tax environments, instead of deferring tax to pay at a later date.
While business aspects of tax may look to have permanent changes, individual and estate taxes will probably continue until an election year. Amendments may happen later on, but as for now, we make adjustments based on any finalized changes this month.