The Short Synopsis Of 2019 Tax Changes

December 1, 2018 - By Andre Weisbrod and Michael Huber

The Tax Cuts and Jobs Act signed into law on December 22, 2017 represents the most comprehensive piece of tax reform in thirty years.  Most of its statutes took effect in January of 2018, meaning you’ll get your first look at how it affects your bottom line when you file your 2018 taxes next year.

1. Big Changes to State and Local Tax Deductions (SALT)

The standard deduction has been doubled to $12,000 (for individuals) and to $24,000 (for married couples filing jointly).  Great news, right? Maybe not. The hike to the standard deduction is counterbalanced by a new $10,000 (for married couples filing jointly) cap on state and local income, sales and property tax deductions.

    2. Mortgage Interest Deductions Get a Downsizing

Previous law dictated that homeowners who itemize their taxes could deduct mortgage interest payments on mortgages up to $1 million.  Not so anymore, as the maximum deductible interest has been trimmed to mortgages up to $750,000. Importantly, this change is not retroactive so current homeowners will not be affected.

    3. New Deductions for Pass-Thru Income on K-1

People who receive pass-thru income on K-1’s from businesses, investments, estates and trusts now get a 20% deduction (some limits apply) under new Section 199a.

    4. Estate Tax Exclusion Soars

Under previous law, the estate tax of 40% applies when a multimillionaire transfers property to heirs.  The Tax Cuts and Jobs Act doubles the exclusion limit from $5.49 million (for individuals) and $11.2 million (for married couples) to $11.2 million and $22.4 million respectively.

    5. Large Families Get a Break

The child tax credit is doubled to $2,000 with the refundable amount increased to $1,400.

    6. Tax Bracket Shakeup

There are still seven tax brackets but the rates and bracket amounts have changed across the board.  We’ve mapped out the changes below. Generically, tax rates have decreased for all.

So what does all this mean for our financial and investment plans?  For some it will mean tax deductions are less of a concern. For instance, those in lower tax brackets might favor Roth IRAs over traditional IRAs, and contributions to 401k plans might be adjusted downward to be no more than the maximum to get a matching contribution.  The difference can be put into other kinds of investment accounts. The types of investments in taxable accounts should also be re-evaluated. Furthermore, there is cause to simplify existing estate plans. Frankly, a law of this breadth is cause to review all tax and financial plans.  

One thing does not change.  We want our financial decisions and investments to be as productive as possible. In this case that means methodically adapting to the new laws without discarding still suitable long-term financial strategies and goals.  Years as a Registered Investment Advisor have taught me to avoid letting the tax tail wag the investment dog.

Final thoughts:  When filing your 2018 taxes this coming year it will likely be of added value to consult with a tax professional and investment representative to adjust how you take income and file taxes.  The Tax Cuts and Jobs Act is a broad bill that goes well beyond the six points detailed here. Preparation and understanding of these changes on a holistic level is key to an efficient filing.

For any questions about investment planning and tax preparation contact us at [email protected] or by phone at 301-296-6203