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What Tax Laws Changes May Mean for You - Pinnacle Investment Management, Inc.

What Tax Laws Changes May Mean for You

December 21, 2017 / Blog


The Tax Cuts and Jobs Act is all but law at this point, and we now have a new tax regime for which to plan our finances. Since the law has some substantial changes, I thought it would be good to summarize some of the important points and how that may effect planning in 2018 and beyond.

The points below only deal with individual taxes (not business income) and only on those areas that I feel relate to the average person reading this. This is by no means all inclusive. We will continue to provide our thoughts on the new tax changes as time progress and technical updates are provided.


Tax Brackets and Rate

We will continue to have 7 brackets; however the rates and income thresholds have changed. The following charts from the Tax Foundation outlines the current rates vs the new rates:


As the charts show, marginal tax rates will fall at most income levels.


Personal Exemptions

In 2017 you are eligible to claim a personal exemption for yourself and your dependents. The personal exemption is $4,050 per person in 2017. You are eligible to claim personal exemptions in addition to your standard or itemized deductions.

Going forward personal exemptions are eliminated.


Standard Deduction

As a potential offset to this, the standard deduction was expanded.


Itemized Deductions

The expanded standard deduction means that a vast majority of people will now claim a standard deduction rather than use itemized deductions, as it will be hard for many taxpayers, especially couples, to get itemized deductions totaling at least $24,000 ($12,000 for singles).


State Taxes & Property Taxes

Along with the higher standard deduction, the deductibility of state income taxes and property taxes has been curtailed.

Under the old rules, you could itemize in full your property taxes and your state and local taxes (although high earners were potentially subject to phase outs).


Matt & Deb live in Connecticut and they both work. Their state income taxes were $8,000 and their property taxes were $8,000. In 2017 they can itemize deductions of $16,000.

With the new rules, you can only deduct a combined $10,000 in state and property taxes.

Example (cont.)

Rather than deduct the full $16,000 as they could under the old rules, Matt & Deb will now only deduct $10,000 in total for state and property taxes in 2018.  Matt & Deb will most likely use the standard deduction as they won’t have enough deductions to itemize.

There is one interesting twist to this, and that is that the $10,000 limit is the same for both couples and individuals. So some individual filers, especially in higher tax states like Connecticut, New York, or Massachusetts, may still be able to itemize.


Carol, single and a higher earner, has $6,000 in state income taxes, $8,000 in property taxes and $4,000 in mortgage interest. In 2017 she can itemize deductions of $18,000.

Under the new law, in 2018 Carol will be able to deduct $10,000 in total for state taxes and property taxes along with the $4,000 mortgage interest, for total itemized deductions of $14,000. While Carol’s total itemized deductions are lower now than they were under previous law, she will still be able to itemize her deductions, since they are higher than the new standard deduction ($12,000 for singles).


Mortgage Debt

Currently (in 2017) you can deduct interest on mortgage debt up to $1,000,000.

The new rule will allow the deduction up to $750,000 on mortgage debt

Interest deductibility on home equity loans is eliminated


Estate Tax

While there was a lot of talk of fully repealing the estate tax, that did not come to fruition. The final bill keeps the estate tax, however it doubles the current exemption amount. The estate tax exemption would have been $5.6m in 2018, however under the new bill it will now be $11.2m.


Child Tax Credit

The Child Tax Credit is now worth $2,000 (up from $1,000) for each qualifying children under the age of 17. The income limits to be eligible for this credit were also greatly expanded, from the current thresholds of $75,000 (single) and $110,000 (married), to $200,000 (single) and $400,000 (married).

In addition, there is a $500 credit for dependents who are not qualifying children, such as college aged children.

Tax credits are “worth” more than Tax Deductions, so this expanded child tax credit may help many families.


Other Changes

One important long term change is a switch in the inflation measure used for tax brackets. Going forward tax brackets will be indexed based on “chained CPI.” Chained CPI inflation adjustments are lower than the inflation index used currently. This means that over time more people will start to fall into higher tax brackets.  While many of the changes previously mentioned in this post are set to sunset at the end of 2025, this change is permanent.

There are also changes to other deductions, including expanded deductibility for charitable contributions, expanded medical deduction, and an elimination of 2% miscellaneous deductions.


Will I Save Taxes with this New Bill?

This is all dependent on your situation. Many filers will see a cut in taxes, but others, especially higher earners who had a lot of deductions under the old rules, may see no cut or even a potential tax increase.

To help get a general understanding of how these new tax rules look from a 30,000 foot view, let’s consider a hypothetical couple (this is an oversimplified example just to help get a basic understanding of the new tax structure):

Bill and Donna are 60 years old, both working, and their kids are grown. Together they make $125,000 (this is after their 401(k) contributions). They have $20,000 in itemized deductions. Below are the calculations for what their tax would be in 2018 assuming that the old laws stayed vs. what they will be with the new laws.




These are just rough numbers, so use them with a grain of salt. But as the example shows, Bill and Donna would save a little over $1,000 in taxes under the new tax rules.

There are a number of online calculators, such as this one,  that will run an estimate of what your taxes may be under the new bill. These are generic calculators that are meant to help you get an understanding of a relatively basic tax situation.

General Thoughts

•  As mentioned above, more and more people will be using the standard deduction rather than itemizing. One potential planning opportunity is to strategically bunch deductions into 1 specific year. For instance, if you are charitable inclined, you could bunch all your contributions into 1 year, rather than spread them out over multiple years.

Mary, single, generally gifts about $5,000 a year to her favorite charities. With the new higher standard deduction of $12,000 she will not be able to itemize, so there is no tax write off for the donation. One option for Mary to consider is to bunch these donations into one bigger sum. For instance, she could lump 5 years of donations into 1 year and donate $25,000 into a donor advised fund. This would allow her to have one year where she could take advantage of itemizing deductions. (With a donor advised fund you get the tax write off today, however you do not actually have to distribute the funds right away, so you could still evenly distribute the funds over a few years if you desired).


• Taxable income (which is your income minus deductions) is used to determine not just your tax bracket for ordinary income purposes, but also the bracket for capital gains tax. With the expanded standard deduction, some filers (I would think this would apply especially to retirees) may have lower taxable income, meaning that they may have more opportunity to take advantage of the 0% capital gains bracket and more opportunity for Roth Conversions.

I would recommend you work with your advisor or CPA next year to understand where your income and capital gains brackets may fall and if there are any opportunities for Roth IRA conversions or 0% capital gains.


• On the other hand, taxable income may now be higher for families with multiple children. For instance a family of 4 (meaning 4 personal exemptions) claiming a standard deduction in 2017 would have total deductions and exemptions equaling $28,900. Under the new rules, they would claim just a standard deduction of $24,000 in 2018.

– However, this doesn’t necessarily mean that they will now pay more in ordinary income taxes, since the tax brackets are lower.



This list is a general overview. As your tax situation gets more nuanced (e.g. business interests) the impact of the new tax bill is also more nuanced. I would recommend you speak with your CPA and/or Financial Advisor to understand how this new bill impacts your financial situation now and in the future.


Sources & Further Reading
Tax Cuts & Jobs Act Final Legislative Text
Conference Committee Notes
Final GOP Tax Plan Summary (Kitces.com)
Tax Policy Center: Analysis of Tax Cuts and Jobs Act

About the author

John Shanley: CFP ® is a Financial Advisor with Pinnacle. He joined in 2015 after previously working as a Financial Consultant for Fidelity Investments. John is a Certified Financial Planner, a graduate of Fordham University and is currently pursuing his Masters degree in Financial Services. John is a native of Pawling NY and currently resides in Suffield with his wife, Jennifer, who is an Immigration Attorney. In his free time, John enjoys reading and is an avid hockey fan.

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