Investor’s column: Here’s how tax reform will affect wealthy Americans

Just back from a Cetera financial advisor conference in San Antonio where I learned many things.

Among them: There’s a huge difference between flying Basic Economy and Economy. I should’ve read the fine print. It cost me an extra $140 to check one suitcase and one (no longer free) carry-on.

I also learned many new tax changes affecting affluent taxpayers. So what’s new for well-to-do taxpayers with at least $250,000 in investable assets or more than $200,000 in household income?

A lot, actually. So let’s start with personal exemptions, standard and itemized deductions.

The IRS allows claiming a standard deduction, a set amount each year, even if you don’t claim itemized deductions, such as mortgage interest and property taxes.

For joint filers, the 2018 standard deduction grows from $12,700 to $24,000. A single taxpayer’s standard deduction increases from last year’s $6,350 to $12,000. The blind and seniors age 65 on Dec. 31, 2018, get an additional $1,300 standard deduction. Unmarried taxpayers 65 and over get an additional $1,600 standard deduction.

Last year each personal exemption was $4,050. Now the personal exemption is gone entirely. A personal exemption is deducted from taxable income for taxpayers and most dependents claimed on a tax return.

Moving expenses are no longer deductible on a tax return for non-itemizers, unless for a military move. Deducting alimony on your tax return, unless grandfathered in, will no longer be deductible after 2018. New alimony recipients won’t include in income, under new rules, after 2018.

Writing off Interest paid on mortgages, including second homes, for primary or second homes now stops at $750,000. State and local income taxes now max at $10,000. Charitable deductions are still allowable.

Now let’s move on to tax credits for child and non-child dependents. For children less than age 17, you can now receive a credit of $2,000, where it had been $1,000. There’s also a new $500 tax credit for dependents who aren’t children. Non-child dependents would be for elder or disabled dependents or children dependents who are older than 17.

These credits phase-out as income increases for joint taxpayers with more than $400,000, and single taxpayers with more than $200,000. This phase-out was previously $110,000 for joint payers and $75,000 for individual taxpayers, and it was partially refundable.

Understand a tax credit is usually more valuable than a tax deduction. A nonrefundable credit can reduce income tax dollar-for-dollar down to zero. So for some limited income people, up to $1,400 of the child tax credit can be refunded, even if the tax is zero. The refundable portion, however, is capped at 15 percent of earned income, wages and income from self-employment that exceeds $4,500.

Let’s discuss changes affecting the Alternative Minimum Tax (AMT), taxes on investments and business pass-through taxes.

The AMT is much less painful for 2018. The AMT adjusts tax preferences and exemptions to ensure many people pay a higher or, supposedly, a fairer tax that doesn’t game the system. So if your AMT tax is higher than your regular tax, then your tax will be the higher AMT.

The AMT exemption was $54,300 for singles and $84,500 for joint filers, and the AMT had phase-outs starting at $120,700 for singles and $160,900 for joint filers. Now the new Alternative Minimum Tax exemption grows significantly to $70,300 for singles and $109,400 for joint filers. The AMT phase-out now expands to $500,000 for singles and $1 million for joint filers.

Interestingly capital gains tax rates and qualified dividends for individuals remain at 0 percent, 15 percent and 20 percent. However, for 2018-2025, capital gains and qualified dividends now have their own brackets, not ordinary-income brackets.

For business owners, there is now a 20 percent deduction on business income that is related to some aggregate income limits. This applies for the years 2018 to 2026. The caps and limits ease for income below $315,000 for joint taxpayers and $157,500 for single taxpayers.

So business owners with sole proprietorships, partnerships and S Corporations might be able to reduce the tax on pass-through income by one fifth. There is a limit on pass-through losses, however. Note non- qualifying service businesses, like lawyers, won’t enjoy this windfall.

Here are some other significant changes affecting affluent taxpayers:

• Previously a Roth IRA re-do, changing a Roth back to a traditional IRA, could be achieved in bad times. Now only a current year Roth contribution redo is permitted.
  
  
• 529 plans for kindergarten to grade 12 and college, up to $10,000 a year, are now allowed. The tax break isn’t permitted for homeschooling your kid, though. The new law permits people to withdraw funds from a 529 plan tax-free for private school tuition.
  
  
• The estate tax was $5.5 million a person and 11 million a couple in 2017, now the estate tax doubles for wealthy individuals until 2025. Now a couple can pass about $22 million tax-free to their heirs.
  
  
• Starting in 2019, penalties for not having qualified health insurance, under the controversial ACA individual mandate, is eliminated.
  
  

For sure there are a lot of tax changes affecting investing. So to be prudent, discuss with a CPA or financial advisor how tax reform affects the benefits of using annuities, municipal bonds, donor-advised funds, charitable remainder trusts, and tax-free distributions. Consider, if applicable, Qualified Longevity Annuity Contracts.

Jim Germer is a CPA and financial adviser at Cetera Financial Specialists, LLC, member FINRA/SIPC, located at 100 Third Ave. W., Suite 130, in Bradenton. Call 941-746-5600 or email jim.germer@ceterafs.com.