Baton Rouge accountants scrambling to decipher details of federal tax overhaul
EXCITING TIMES: Brandon Lagarde, of Postlethwaite & Netterville, says the federal tax code was hardly simplified and whether you benefit or not depends on an
individual’s financial situation. (Photo by Brian Baiamonte)
The new tax overhaul is “chock full of excitement” for tax professionals, says Brandon Lagarde, a director in Postlethwaite & Netterville’s tax services group. As you would expect, he got a lot of calls late last year from clients wondering how the changes would affect them.
“There’s no simplification [of the tax system] in this bill,” he says. “We feel pretty good about our jobs being secure.”
Lots of people will save money, at least in the short term, but the impact will vary depending on your personal finances.
“Not everyone’s taxes will go down,” Lagarde says. “Some will go up. You really need to look at your own situation to figure which way it is [for you].”
Depending on who you are, the new bill may have given or taken away, say Bill Campbell, a certified financial planner with Peters Wealth Advisors. While taxpayers will enjoy lower income tax rates, with the highest bracket falling from 39.6% to 37%, those benefits are offset by the loss of personal deductions and popular write-offs like mortgage interest, and state and local taxes, he says.
As 2017 was drawing to a close, tax and investment experts still were absorbing the changes.
“There’s probably been such a rush [for Congress] to get something done, that I’m sure there will be some unintended consequences that pop up later on,” says Pete Bush, CEO of Horizon Financial Group.
For example, some paid employees might want to investigate going freelance and creating an LLC to take advantage of a new tax break for pass-through entities (See related story). Starting this year, income from pass-through businesses up to $157,500 annually—or $315,000 for a married couple—can qualify for a 20% deduction.
“There’s probably been such a rush [for Congress] to get something done, that I’m sure there will be some unintended consequences that pop up later on.”
—PETE BUSH, CEO, Horizon Financial Group
In other words, only 80% of that income would be taxed. But there are rules that govern what types of income qualify for the deduction, and the IRS might see fit to revisit and tweak those rules and others in response to the new legislation.
As Bush points out, tax evasion is illegal, but tax avoidance—using strategies permitted by law—is not.
“As these things pass, and the dust settles, it’s sort of like, ‘Let the games begin,’” he says.
THE FINE PRINT
Here are the most significant provisions in the new tax law that target individuals and couples. Changes in the law related to personal income generally expire at the end of 2025:
INCOME TAX RATES: There are still seven brackets, but from now until 2026 the thresholds are higher and the rates lower. At the top, individuals will pay 37% on income above $500,000, versus the previous top bracket of 39.6% above $418,400. Couples filing jointly will pay 37% above $600,000, versus 39.6% above $470,700.
ITEMIZED DEDUCTIONS: Removes limitations on itemized deductions. However, miscellaneous itemized deductions, such as the one for investment advisor fees, are eliminated. University donations made for the right to purchase sports tickets no longer are deductible. State and local tax deductions are capped at $10,000, although this change has less impact in Louisiana than in high-tax states. Interest on new mortgage debt above $750,000 is no longer deductible. It might be worth doing a little math to determine whether you should refinance your mortgage, says certified financial planner Bill Campbell of Peters Wealth Advisors.
ALTERNATIVE MINIMUM TAX: Exempts singles making up to $70,300 and couples up to $109,400 until 2026. With the removal of the state income tax deduction and miscellaneous itemized deductions, it is likely that high-income taxpayers will only be subject to the AMT when they have a substantial amount of long-term capital gain taxed at the preferential long-term rates, says Brandon Lagarde, tax director with Postlethwaite & Netterville. Historically, large state tax and miscellaneous itemized deductions are what triggered the AMT. Without those items being deductible, it’s unlikely the AMT will apply, he says.
ESTATE TAX: High-wealth individuals who die between now and the end of 2025 will be able to pass on estates worth as much as $11.2 million tax free, compared to a maximum of $5.49 million last year. For couples, the new threshold is $22.4 million.
STANDARD DEDUCTION: Nearly doubled to $12,000 for singles and $24,000 for couples, although this change won’t affect most high-end earners.
CAPITAL GAINS: The capital gain rates of zero, 15% and 20% remain. Investors dodged a bullet when the conference committee removed a provision requiring “first in, first out” stock sales. Taxpayers still can choose which stocks from a particular company to sell, rather than having to sell first the stock that was bought first.
PRIVATE-SCHOOL TUITION: Parents can use a tax-deferred 529 savings plan to save up to $10,000 a year for elementary and secondary education at private and religious schools. Previously, those plans were only for college tuition.
CHILD TAX CREDIT: Couples making up to $400,000 are now eligible for a $2,000 credit per child.
401(k): People who leave a company with a 401(k) loan outstanding would be able to repay the loan by the day they file their federal tax returns without penalty. Previously, such employees were supposed to repay such loans within 60 days of their departure.
ROTH RECHARACTERIZATIONS: Savers no longer are allowed to reverse their decisions to convert a pretax IRA to a post-tax Roth IRA.
FLOOD DAMAGE: People who suffered more than $500 in flood damage in 2016 that wasn’t covered by insurance or offset by government grants may file an amended return to write off those losses.
PERSONAL EXEMPTION: The $4,050 per-person exemption is eliminated.
INFLATION INDEXING: Changes the way tax brackets are indexed to inflation, meaning people will enter higher tax brackets more quickly as their income increases. Could lead to higher taxes over time for middle-class taxpayers, but not an issue for taxpayers already in the highest tax bracket.
INSURANCE MANDATE: The Obama-era requirement that most individuals purchase health insurance has been repealed, which could have a significant impact on the health insurance industry.