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1. Tax brackets will decline on average 2%. Deferring taxable income from 2017 to 2018 will be slightly beneficial depending on the tax bracket.
2. The state and local property tax (SALT) deduction will be limited to 10,000 in 2018. If your current total SALT deductions are over $10,000, it may make sense to prepay your property taxes and your estimated state income tax payment before 12/31/2017. Be aware though, that this only makes sense if you are not subject to the alternative minimum tax (AMT). This is because the SALT deduction is added back in calculating AMT. We have analyzed this situation for all of D3’s Affordable Family Office (AFO) clients.
3. 529 Plans can be used for primary, secondary and higher education expenses. Keep in mind that the major benefit for contributing to 529 plans are the tax free (if used for education) compounding. If the funds are used every year, the primary benefit will be the annual state tax deduction (for Illinois).
4. Front end loading charitable contributions may make sense if your current total itemized deductions are less than $12,000 for an individual and $24,000 for a couple. If your total itemized deductions are less than these amounts in 2018, you will not get any incremental tax benefit unless the charitable contribution puts you over these amounts. We have analyzed this for our AFO clients.
5. Miscellaneous itemized deductions are eliminated. This mean investment advisor fees are no longer deductible. It will make sense for clients to consider paying appropriate investment advisor fees out of individual retirement accounts (IRA). This will effectively be a tax-free distribution from an IRA.
6. Business tax rates go down to 21% except for certain pass through tax entities. Owners of these pass-through entities will get to exclude 20% of the pass-through income on their personal tax returns. This gets phased out at higher income levels and applies primarily to non-service related business. This needs further analysis.
7. The estate tax exemption increases to $11 million for individuals and $22 million for couples. This means that most clients will only need to make sure their estate plans avoid probate and minimize their state’s estate tax (Illinois has an estate tax).
This is not a comprehensive list of the changes, but is intended to be a summary of items that have the most impact on D3 clients. Please remember that all of this is somewhat complicated by the fact that the personal tax law changes expire on 12/31/2025. More to come in 2018.