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Tax Reform and What it Means for You

We have been getting many questions regarding the new tax law change that are now in place for this year. Tax reform passed, and our clients are wondering what the bottom line is for their situation. We believe that most of our individual/family clients and corporate business clients will see a tax savings but there will be the lucky few of you who will inevitably end up paying more. Here is a breakdown of some highlights.

Let’s get the negative stuff out of the way… The areas that may be less advantageous for some of you include:

  • A $10,000 limit for deducting State and Local Taxes (SALT)

  • The mortgage interest deduction caps at the interest on $750,000.

These two hurt those of us living in California and other states where the cost of real estate and state tax rates are higher.

The areas that are likely to save you money include:

  • The standard deduction increased to $12,000 for individuals and $24,000 for married couples filing jointly. This will likely make it less likely that many of our clients will need to itemize – making their tax filing quicker and easier.

  • Lowered tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%

  • Increased charitable contribution limit – you can now deduct up to 60% of your adjusted gross income if contributed to a charity.

Businesses are going to see some positive changes:

  • Pass-though small businesses can now deduct 20% of their pass-through income. But, be careful, there are phaseout limits if you are a “professional services” company.

  • The corporate interest rate was sharply lowered from 35% to 21% which hopefully means more hiring or increased compensation.

  • Companies can repatriate monies earned in other countries one time for a limited tax.

Some positives we see from a financial planning perspective

  • The estate tax exception doubled to $11.2 million for individuals and $22.4 million for married couples. While we personally think this could affect charitable giving which is important to our mission as a company, this simplifies the estate planning for many of our clients.

  • 529 College Savings Plans are no longer only for college. These can now be used for both private schools and tutoring for grades K-12. Having the funds in these accounts for a shorter period of time is likely going to affect investment returns, but many families can use every penny they can get.

  • Alternative Minimum Tax AMT is adjusted for inflation – hopefully taking out a few people who would have previously been required to pay

Interesting Fact: You can no longer deduct your season tickets to your favorite college or university athletic event.

Don’t get too comfortable with these changes… most of the tax breaks expire in 2025 – just in time for us to get used to these strategies. The ones that look like they will be sticking around are the corporate changes. As we mentioned, we are hoping for increased employment or increased wages, but some companies may decide to use the money to buy-back some of their own shares to increase earnings per share. We don’t have a crystal ball, and we cannot predict what will happen. Because of that – we keep our mantra strong – Markets will change and so will we.

This article isn’t intended to give tax advice. Lily Wealth Management and Prosperity Financial Group recommend that all of our clients work with a competent tax and accounting professional both for estate planning purposes and for preparing their state and federal returns. This article should be used merely as a discussion tool with your professional.

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