What You Need to Know about the New Tax Bill
My team at Keen Wealth has been hard at work pouring over the new tax bill that President Trump signed into law at the end of 2017. There’s much to unpack and a few details that still haven’t settled into place, but I know that my listeners and clients have questions. So while this probably won’t be our only episode this year on what might be the biggest change to the tax code in decades, today we will look at some of the most important changes this bill introduces. Hopefully this discussion will help folks cut through all the political clamor, and start thinking about the potential impact on their financial planning.
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Insights from Today’s Podcast on the New Tax Bill
1. Rates are going down.
The new tax bill didn’t end up reducing the number of tax brackets, but it did shave a few percentage points off of each bracket. Also, the first $9,525 of income for folks filing individually and $19,050 for married couples filing jointly will be taxed at 10%. Here’s a table with the complete bracket breakdown:
Source: https://www.forbes.com/sites/robertberger/2017/12/17/the-new-2018-federal-income-tax-brackets-rates/#43831d6c292a
2. Potentially simplified deductions and exemptions.
Since the 2016 election, one of Congress’ big selling points for this new tax bill has been simplification. And while the jury’s still out on whether or not this overhaul will make filing easier for all of us, the standard deduction could be one place where Congress delivered.
If you're single, the standard deduction in 2018 will be $12,000. For married couples filing jointly, it will be $24,000. That’s nearly double the 2017 deduction rates. Such a sizeable jump could mean more people taking the standard deduction rather than going through the hassle of itemizing.
The tradeoff is that the new tax bill eliminates personal exemptions. For your 2017 tax return, you are able to deduct $4,050 as a personal exemption for you, your spouse if married, and each dependent. For 2018 that all goes away. The new bill does increase the child tax credit to offset some of those exemption losses, but if you still have dependent children in the house, this is one of the key issues you’re going to want to discuss with your fiduciary financial and tax advisors.
3. A new cap on your SALT.
People who usually claim itemized deductions should be aware that the new bill caps the deduction for state and local taxes (SALT) at $10,000. This figure is the result of some compromise in Congress, as some early drafts of the new tax bill floated the idea of eliminating SALT deductions altogether. Depending on your employment status, marital status, where you live, and whether or not you own a home, this is another change that could nudge you towards taking the larger standard deduction.
4. Get to know the “chained CPI.”
One big change in the new tax bill that’s escaped much of the general discussion is its new mechanism for adjusting tax brackets to cope with inflation. In years past, the brackets grew based on calculations that included the consumer price index (CPI) – essentially a measure of the goods and services the typical household buys. The new tax bill uses what’s called the chained CPI, which assumes that if there's a particular good or service that gets too expensive, consumers will trade down to a cheaper alternative.
This switch is going to reduce the rate of inflation by which the brackets will increase. Over time, this will bump more and more people up to higher tax brackets, and, in theory, cause you to pay more taxes than you would under the old CPI measure.
5. Permanent changes to the corporate tax rate.
The new personal tax rates are set to expire in 2025. The new corporate rate of 21% is permanent, and a big drop from the previous 35% rate on taxable income over $18 million. The new tax bill also tries to incentivize companies with overseas accounts to bring their cash back to the States with a reduced 15.5% tax on repatriated cash, and an 8% tax on illiquid assets like equipment.
As we discussed last year, the big driver of the markets isn’t who’s president or what’s happening on the other side of the world: it’s corporate earnings. Will these new tax laws level the international playing field for US businesses and drive corporate earnings higher? We believe that’s going to be one of the key economic questions that will be answered in the next few years.
6. Your April 2018 tax payments probably won’t be affected.
There are other provisions in the new tax bill that could affect what you end up paying for 2017 this April, such as a lower threshold for deducting medical expenses based on your adjusted gross income. But for most folks, the big changes won’t come into effect until you’re getting ready to pay your 2018 taxes a year from now.
However, that doesn’t mean you shouldn’t start thinking ahead! If you haven’t already made an appointment to meet with your fiduciary advisor and discuss your plans and goals for the new year, do it today. And bring a list of questions you have about the new tax bill to that meeting. If this January is any indication, the whirlwind of hot air on the internet and cable news isn’t going to die down much in 2018. Don’t get caught up in all that – your financial future is just too important. We believe that the best-qualified people to give you the answers you need are tax advisors, and fiduciary advisors that include Certified Financial Planner™ professionals like my team at Keen Wealth. And when the dust finally settles on this new tax bill, you can trust that we’ll unpack more important features and developments with another informative episode of Keen on Retirement.
Bill Keen on the New Tax Bill...
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About Bill
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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