I'm John Harris, Managing Director at Coral Gables Trust Company and welcome to our What You Need to Know blog!
On December 22, 2017, President Trump signed into law the first significant reform of the U.S. Tax Code since Ronald Reagan was in office. Here is Part 1 of how it will affect your finances. The new tax act will affect how you make decisions on estate planning, buying a home, or setting up a business. In this first blog, I will highlight major parts of the law to keep in mind, starting with individual income taxes.
Now that the new tax act is coming into effect, your personal tax rates and income brackets will be lowered, yet they will also expire (or sunset) at the end of 2025. What does this mean? Specifically, this means that the top rate will fall from 39.6% to 37%, the 35% bracket will stay the same, while the 33% bracket will fall to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket will remain at 10%. So, what does that do to your standard deduction? The standard deduction will essentially double, while the personal exemption will have been removed. The deduction/exemption trade off works well for most people but may not for those with many dependents. The law also temporarily raises the exemption amount and exemption phaseout threshold for the alternative minimum tax (AMT), which affects higher earners. These changes will also sunset at the end of 2025. The sunset provisions were necessary as a compromise to allow for the expeditious passage of the tax reform bill.
If we break it down even further, your deduction for state and local income taxes, property taxes and sales tax, or SALT, will remain in place if you itemized your taxes. Keep in mind, it is subject to a $10,000 cap. This will likely hurt taxpayers and homeowners in high tax states. But if you live in Florida, since Florida’s SALT is much more reasonable, Florida increasingly becomes a more compelling comparative domicile from a tax perspective. Want to move to Florida? In addition, the mortgage interest deduction for new home purchases has also been lowered from $1 million to $750,000 post Dec. 15, 2017.
Also keep in mind, beginning in 2018 the deduction for interest paid on a home equity line will no longer be eligible for the home mortgage interest deduction (with certain exception for the purchase of real estate and or direct improvement thereof). The new tax law does still preserve the deduction of mortgage debt used to acquire a second home.