On Friday, December 15th, 2017 the final version of the legislative text involving the Tax Cuts and Jobs Act (TCJA) was released. This was accompanied by the supporting Conference Committee notes. Here is a summary of how this might affect you in 2018:
Income tax brackets
- Seven total brackets.
- Top bracket down from 39.6% to 37%.
- Most brackets have been trimmed slightly.
- Subject to sunset.
- Effective January 1st 2018.
- No change for 2018.
- For agreements entered into on 1/1/19 or later, alimony is NOT tax deductible for the payor and the recipient will not be taxed.
Capital gains and dividend rates
- Unchanged from current law.
- Increased from $6,350 to $12,000 for single filer.
- Increased $9,350 to $18,000 for head of household
- Increased $12,700 to $24,000 for Married filing jointly.
- Effective January 1, 2018.
Suspension of personal exemption
- Will require change to standard practice of claiming withholdings on W-4 for all employees.
- There is no guidance yet on how this will be done.
- Effective 1/1/2018.
Phaseout for Child Tax Credits
- This increased dramatically. This will affect support calculations by allowing more high-income individuals to take advantage of the credits.
- The phaseout is increased from $75,000 to $200,000 for individuals.
- These are valuable credits as they work as a dollar for dollar offset against taxation rather than a deduction from income.
$10,000 cap on state and local income and property tax deductions.
- This is a combined total.
- This provision will affect our clients drastically: Consider the average California family with a $1,000,000 home and $10,000 property tax bill that comes along with it. The property tax alone will eat up the entire deduction. Now, assume that family earns $400,000 per year with two wage earners. Their combined state income taxes easily exceed $30,000 which will no longer be deductible on their federal return.
Mortgage interest deduction
- Limited to $750,000 loan effective for all purchases going forward.
- All homes purchased before 12/15/2017 grandfathered to $1,000,000.
- Home equity interest is not deductible and no grandfathering.
Repeal of miscellaneous itemized deductions
- Under current law, it is possible for a client to deduct a portion of their legal fees during divorce as miscellaneous itemized deductions; specifically, those legal fees incurred in seeking or defending oneself from alimony. In highly litigated high-income cases this number can rise to six figures and provide much needed tax benefits during dissolution. The new law suspends all miscellaneous itemized deductions.
Bill does not amend or repeal Capital Gains exemption for principal residence despite revisions proposed.
- Both houses had included repeal or phase out of exemption but did not end up in final bill.
Doubled the estate tax exemption
- $11,200,000 for singles.
- $22,400,000 for married couples.
Many of the reforms sunset in 2025.
With limitations on deductions for state and local taxes and mortgage interest, far fewer clients will end up itemizing in the coming years.
What does this mean?
This means our process for entering data into Dissomaster (California support calculator) will change. It will be extra important to be sure you do not enter full mortgage interest amounts if the indebtedness is over the $750,000 limit. In the interim you can use the tax settings in Dissomaster to prepare hypotheticals showing support guidelines with non-taxable and non-deductible alimony by doing the following:
- Go to the tax settings.
- Toggle the settings under the general tax settings section.
We ran a hypothetical guideline calculation with the father earning $20,000 per month and mother earning $3,000 and the combined net disposable income decreases by $600 per month.
There are provisions in the bill that keep taxpayers from accelerating state and local taxes or deductions payments for future years into their 2017 return. So, there is no way to game this change as we may have in the past by accelerating said deductions into higher income years.
Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.
Contact us to find out how we can help you through this process.