What You Need to Know about Tax Reform
What You Need to Know about Tax Reform

What You Need to Know about Tax Reform



Frederick W. Lundin
Frederick W. Lundin

Wealth Management Senior Account Executive
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What You Need to Know about Tax Reform

Key Highlights for You: How your taxes may be impacted in 2018.

On December 22, 2017, President Trump signed into law HR 1, commonly known as the “tax cuts and jobs act.” It is the largest tax reform bill since the 1986 reform by President Ronald Reagan. While it was initially promised that the new tax reform would be simpler than the incredibly complex IRS tax code, the new tax reform is far from simple.

After multiple versions of the bill making their way through the House and the Senate, a final 1,000-page version emerged. The following are initial observations that we feel are important to consider in alignment with your current financial plan.


Impact on Individual and Household Taxpayers:

Overall there was a decrease in the marginal tax rates for individuals across all incomes. These lower rates along with a higher standard deduction seem to push overall taxes down. However, the additional suspension or repeal of many common itemized deductions, such as the new limit on deductible taxes or miscellaneous deductions (e.g., investment planning or tax preparation fees), will likely stop many taxpayers from itemizing deductions. This likely will result in many taxpayers taking the increased standard deduction.

Education Funding and Changes to 529 Accounts:

Another key component of the bill is the expansion of the qualified education expenses for which a 529 plan can be used. The code will now allow funds within a 529 plan to be used for tuition at an elementary or secondary public, private, or religious school. These expenses were disallowed in the previous tax code. This allows the proceeds from these tax-favorable education funding vehicles to be used for an expanded scope of expenses.

Multi-Generational Planning (Kiddie Tax Changes):

The new bill also modifies the way that a child’s unearned investment income is taxed. Currently the “kiddie tax” allows a parent to move income-producing assets into a descendants’ name and use their tax rate for a portion of the income; the remaining income is taxed at the parents’ assumed higher rate. The new bill changes the applicable tax rate from the parents to trust and estate tax brackets that increase at much lower thresholds of taxable income. This could disincentive the financial planning strategy by shifting income-producing assets to children for lower overall tax liability.

Roth Conversion Recharacterization (Strategy Eliminated):

The bill also repeals a common financial planning strategy of the recharacterization of Roth IRA contribution or conversion amounts at the end of the year based on the market gain or loss throughout the applicable tax year. This was a strategy used by many advanced financial planners to optimize a client’s tax situation and maximize contributions to Roth IRAs.

Repeal of Obamacare (sort of):

As expected, the Affordable Care Act (commonly known as Obamacare) penalty that was instituted for those individuals without minimum essential health insurance was repealed; however, the 3.8% net investment income tax and the 0.9% additional Medicare tax enacted to originally fund Obamacare remain. This illustrates the danger that once a tax is imposed, it rarely is removed from the code--regardless of the existence of the original purpose of the tax.

Personal Alternative Minimum Tax (AMT):

Although it was highly criticized, the Alternative Minimum Tax remains a part of the individual tax code. However, the threshold for the level of income needed for the AMT to apply was significantly increased, reducing the number of taxpayers that are affected by the Alternative Minimum Tax.

Estate Tax Exemption Increase:

Early on, insiders speculated that the new bill hinted at a complete removal of the estate and gift tax. But the final bill left the tax within the code, doubling the level of assets one must have to fall subject to the federal estate tax ($11.2 million for individuals, and $22.4 million for married couples).


Overall, as expected, the new tax bill can be considered advantageous to taxes imposed on businesses from small family-owned businesses to multinational corporations.

Territorial Tax Landscape Shift (Bringing Home Profits):

It is clear that the new bill’s intention is to stimulate business growth by focusing on incentivizing companies to bring back funds and resources that are held outside the U.S. This will be achieved by creating a safe-harbor period. The IRS will reduce the cost to corporations to bring back into the United States economy corporate profits held offshore.

Capital Assets and Corporate Expenditures:

The new bill shortens the amount of time that corporations are required to capitalize assets through depreciation as well as raises the limit on section 179 expenses that can be immediately deducted from income for 100% of certain business expenses. This will inherently incentivize corporations to streamline capital expenditures that may have been deferred, due to the inability to take the full deduction in the year the asset is acquired.

Impact on Small Business and Pass-Through Entities:

There is also a new deduction created for those who receive pass-through income from a partnership or self-employment business. This deduction allows those receiving pass-through income to deduct a significant part of their earnings from taxable income. This will incentivize the use of pass-through entities to distribute earnings through structures such as partnerships, LLCs, and S-Corporations. This is a significant win for small businesses.

As with the personal section of the bill, the section focusing on businesses is complex with clear tradeoffs between a bipartisan legislation structure. The three main components in the bill regarding corporations are the reduction of the marginal tax rates, the introduction of a deduction of up to 20% of pass-through income (primarily benefiting small businesses), and the international tax landscape for companies engaged in the global business environment.


The expansive overhaul of the tax code is seen as an attempt to simplify the process of taxation for many taxpayers by increasing the standard deduction and limiting or repealing many previously itemized deductions. It is clear that there is a bias towards creating opportunity for businesses within the United States, and helping American companies become more competitive in the international landscape in part by reducing their overall tax liability.

Although the new tax law went into effect January 1, 2018, it is important to remember that the new law will not affect the tax return that many will file in April of 2018 (based on 2017 income). It is also important to remember that any tax strategy developed from the change in tax code should be carefully considered for each individual situation, as blanket tax strategies oftentimes are not applicable to individual financial pictures.

For more information, please see the additional supplementary information* that digs deeper into the specific aspects of the changes, and how your financial plan may benefit from the change in tax law:

* Information provided within has been gathered from sources believed to be reliable, but we cannot guarantee full accuracy. This does not constitute individual tax or financial advice. We encourage you to use this information in conjunction with your tax advisor.

Tags:  Changes in Federal Taxes, Corporate Tax Changes, HR 1, Individual Tax Changes, Tax Bill, Tax Changes, Tax Deductions 2018, Tax Exemption, Tax Reform, Taxes 2018

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.

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