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On December 22, 2017, the United States Congress enacted the largest piece of tax reform of the federal tax code in more than three decades. With the passage of the Tax Cuts and Jobs Act (TCJA), virtually every American has been affected in some way by sweeping modifications made by the law, many of which have already been implemented.
While the full range of changes might be hard to comprehend for most consumers, there are several key areas that have been affected by these modifications, including charitable giving, buying a home and getting a divorce. Here’s how the recent tax cuts might impact your clients.
How Tax Reform Affects Charitable Giving
With the passage of the TCJA, charities and taxpayers making charitable gifts will widely benefit, since the charitable tax deduction was expanded by the new law. However, that’s not without one huge caveat – itemized vs. standard deductions.
With new limits on other tax deductions, like state and local taxes (SALT), the number of taxpayers who itemize their deductions will be drastically reduced. Under the previous tax law, 70 percent of all taxpayers used the standard deduction – under the new law, 85 percent will now use it. Because of this, donors using the increased standard deduction rather than itemizing deductions won’t gain as much of a tax benefit from giving charitably.
Clients who will not itemize their deductions can take advantage of the new tax law in other ways. For example, it’s possible for donors to make tax-free gifts of up to $100,000 per year (total) through a direct distribution to a charity from an IRA. These gifts also qualify as part of the required minimum distribution from an IRA for the given year.
Donating funds straight from an IRA doesn’t require the donor to report income, nor does it count as a charitable deduction on their tax returns. Because of this, the donor can report a lower adjusted gross income (AGI), opening up other opportunities to save money. For example, Medicare premiums, capital gains tax or investment excise tax, which are all tied to AGI, may come down.
How Tax Reform Affects Home Buying and Relocation
With the passage of TCJA, there has been plenty of discussion around the new limit of $10,000 for SALT deductions. Under the old tax law, high earning clients could reduce their state income tax rate burden by up to a third when they deducted those taxes from their federal tax liability. However, with clear expectations set by the IRS that no modifications can be made to this new limit, some high-tax states are reeling at the proposition that high-income earners may move to lower-tax states, should the cost burden become too heavy.
The repercussions of the new limit are uncertain, and it’s not quite clear how widely this is affecting relocation decisions at this point. Some states, including Minnesota, are projecting a revenue windfall from the from the tax reform’s base-broadening measures, because the TCJA reduced many deductions so that more income is taxed at the state level. However, if high-tax states don’t attempt to lower their tax levy, sharing a border with a low-tax state may prove to be a huge disadvantage in retaining high-net-worth individuals.
How Tax Reform Affects Divorce and Alimony Payments
The biggest change to divorce proceedings has to do with alimony. In the past, the higher earning spouse was able to deduct alimony payments to their spouse who reported the payments as taxable income. With the new changes to the tax code, that opportunity is eliminated. Additionally, the spouse who receives alimony payments won’t have to pay income tax on the money. These changes go in effect January 1, 2019, but they aren’t retroactive. Only affect divorce agreements signed after December 31, 2018, so pre-existing alimony orders will not be impacted.
If your clients have a prenuptial agreement, they should review their contracts since many of those agreements likely contain alimony provisions based on the old law, and the tax reform might impact how they are executed upon.
Trust Point Inc., is a financial and investment firm with locations in Minnesota and Wisconsin. They specializes in wealth management, estate planning and charitable giving, offering expertise and guidance to help clients navigate the complex financial world. Please visit www.trustpointinc.com or email firstname.lastname@example.org to find out more information.