Five Tax Reform Points for 2018

tax

Note: This is a high level discussion of some provisions of the new tax law, and does not cover the entire contents of the law

The tax bill signed into law as of December 22, 2017 is the most sweeping tax reform put into action since Reagan signed major legislation in 1986. It is going to have implications for corporations and individuals. The individual provisions technically expire at the end of 2025 unless Congress takes future action to keep them in place, while the corporate provisions are permanent. Although these changes will not affect filing for the 2017 tax year, it is prudent to understand how they could impact your investment decisions through 2018 in preparation for next year’s filing. So, here are five things worth thinking about in 2018.

Five tax points for 2018 Click To Tweet

1. Individual Tax Bracket

  • Still seven tax brackets based on income
  • New rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • Some of these tax brackets are lower, therefore changing the breakeven benefit analysis of tax-efficient vehicles like municipal bonds.

2. Corporate Tax Rate

  • Cut from 35% to 21%
  • No alternative minimum tax
  • This could favorably impact earnings

3. Estimated Federal Deficit Impact

There are a few ways to look at this figure and the expected impact.

  • Static methodology: assumes no pick-up in economic activity due to the improved tax position of corporations and individuals. Under that scenario an increase in the deficit of $1.46 trillion could occur over the next decade. (www.cnn.com)
  • Dynamic methodology: includes an economic growth projection that shows a more optimistic increase in the deficit of about $448B (www.businessinsider.com).
  • So, it looks like we are looking at a scenario where government spending still has to be addressed in order to meaningfully reduce the deficit, which is no different than the position we’ve been in for decades, other than the fact that the potential economic growth should help the equation.

4. Alternative Minimum Tax

Tries to ensure that those receiving a lot of tax breaks still pay some federal income taxes. The exemption has been raised:

  • Filing Single – $70,300
  • Filing Joint – $109,400

5. Estate Tax

  • The lifetime estate and gift tax exemption is now $11.2 million for individuals, and at $22.4 million for married couples
  • Annual gift exclusion is now $15,000
  • May make charitable planning and estate planning less critical

Final thoughts

Obviously, there is much more that goes into the bill, but I wanted to focus on some of the major implications, especially when it comes to investment planning. We plan to publish a follow up blog that discusses the tax bill changes from a tax planning perspective next month. Visit us then to learn more about some of the details of the implications of the tax bill on you and your clients.

Source: IRS Website as of 1/30/18.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

 

 

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John Frownfelter

John Frownfelter

John Frownfelter is the investments contributor for Practically Speaking and the managing director of investment solutions within the SEI Advisor Network.

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