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TCJA Personal and Professional Implications Seminar-04-18


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Slides for a 50-minute seminar for Rutgers University faculty and staff about personal and professional implications of the TCJA tax law.

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TCJA Personal and Professional Implications Seminar-04-18

  1. 1. The Tax Cuts and Jobs Act: Personal and Professional Implications for Rutgers Faculty and Staff Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension
  2. 2. Income Tax Background
  3. 3. Background: Major Taxes Paid in the U.S.  Taxes on Purchases – Sales tax and excise tax (e.g., gas, cigarettes)  Taxes on Property – Real estate property tax – Personal property tax  Taxes on Wealth – Federal estate tax – State inheritance tax  Taxes on Earnings – Income tax and Social Security tax
  4. 4. Background: The Progressive Nature of Federal Income Tax • Progressive tax – Takes a larger percentage of income from high-income taxpayers than low-income taxpayers. – Federal income tax • Regressive tax – Takes a decreasing percentage of income as income increases. – State sales tax
  5. 5. Background: Marginal Tax Rate Is Applied to the Last Dollar Earned • Marginal Tax Bracket (MTB) – Income-range segments that are taxed at increasing rates as income goes up • Marginal Tax Rate – The tax rate applied to your last dollar of earnings • Established by Congress and change periodically • Major overhaul of federal income tax rates in TCJA
  6. 6. Background: Tax Credit Versus Tax Deduction $100 Tax Credit Reduces Your Taxes by $100 $100 Tax Deduction Amount Your Taxes are Reduced is Based on Your Tax Bracket Example: $5,000 x .22% mtb = $1,100 of tax savings; $3,900 net cost
  7. 7. Background: Types of Deductions Deduction = An amount subtracted from gross income to reduce the amount of income subject to tax. • Standard Deduction- Amount established each year by tax code; no need to itemize deductions; amount is based on a taxpayer's filing status, age, etc; no receipts needed • Itemized Deduction- Specific amounts spent on certain goods and services throughout the year; allowed deductions are outlined by the IRS and include such expenditures as mortgage interest and charitable donations Deduction-Calculator/ (Mortgage tax deduction calculator) 7
  8. 8. Background: Itemizing Required for Charitable Gift Benefits • If you claim the standard deduction on your tax return, charitable gifts will not provide a tax benefit – Psychic benefits of giving to charity are another issue • You must itemize expenses on Schedule A to deduct charitable donations.
  9. 9. Background: Refundable and Non-Refundable Tax Credits • Refundable: When tax credits are greater than the amount of tax you owe, the IRS sends you a tax refund for the difference – Example: Earned Income Tax Credit (EITC) • Non-Refundable: Credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already had one. In other words, your savings cannot exceed the amount of tax you owe. – Example: Child and Dependent Care Expenses Credit
  10. 10. Background: Tax-Rate Schedules and Tax Tables • Tax-Rate Schedules – Used by filers with a taxable income of $100,000 or more; requires a mathematical computation to determine tax liability • Tax Tables – Used to look up one’s tax liability according to tax filing status and income range
  11. 11. Federal Income Tax Table Filing Status Taxable Income Tax Liability
  12. 12. Background: Tax Withholding
  13. 13. Background: Impact of W-4 Form Decisions on Net Pay 0 allowances = max taxes deducted* = Smaller take home pay = Larger tax refund + allowances = less taxes deducted = Larger take home pay = Smaller tax refund NOTE: Taxpayers can add extra withholding beyond “0” allowances; e.g., +$50 more
  14. 14. General Tax Planning Strategies to Minimize Taxes If you expect Then you should Because The same or a lower tax rate next year Accelerate deductions into this year Greater benefit to higher rate The same tax rate next year Delay income into next year Delay paying taxes A higher tax rate next year Delay deductions Greater benefit Accelerate income Taxed at lower rate
  15. 15. Background: Alternative Minimum Tax (AMT) – Paid by taxpayers with high amounts of certain deductions and various types of income – Designed to ensure that those who receive tax breaks also pay their fair share of taxes – Has increasingly been affecting less affluent taxpayers, especially in high-tax states (e.g., NJ) – A high proportion of long-term capital gains to ordinary income can trigger the AMT
  16. 16. Background: Tax Avoidance and Tax Evasion Tax Avoidance (Minimization) – Legitimate methods to reduce your tax obligation to your fair share but no more (e.g., deductions, credits, tax-deferred/tax-free investing) Tax Evasion – Illegally not paying taxes you owe, such as not reporting all income or overstating deductions
  17. 17. Any Questions About the Background Information?
  18. 18. Tax Cuts and Jobs Act The Tax Cuts and Jobs Act was passed by the U.S. Senate and House of Representatives in late December 2017 and signed by President Trump on December 22, 2017. This law will impact individual taxpayers and businesses on a scale that has not been seen in over 30 years.
  19. 19. Your Tax Return Was Supposed to Fit on a Postcard!
  20. 20. Tax Cuts and Jobs Act #1 • Eight year period of lower individual tax rates from 2018 through 2025 with seven temporary tax rate brackets ranging from 10% to 37% • Elimination of personal exemptions (from 2018-2025) • Nearly double the standard deduction ($12,000 for singles and $24,000 for married couples filing jointly in 2018) – Fewer people will benefit from itemized deductions
  21. 21. Federal Marginal Tax Rates: 2017 and 2018
  22. 22. Tax Cuts and Jobs Act #2 • $10,000 cap for state and local tax (SALT) deductions (e.g., state income tax and municipal property tax) for taxpayers who itemize; NOT indexed for inflation • Repeal of all miscellaneous deductions that were previously subject to 2% of adjusted gross income (AGI) floor (e.g., union dues, uniform expenses, unreimbursed business expenses, tax prep fees) • Enhanced child tax credit of $2,000 per qualifying child; $1,400 of the credit is refundable
  23. 23. Tax Cuts and Jobs Act #3 • Lower medical expenses deduction threshold of 7.5% of AGI for tax years 2017 and 2018 – NJ income tax floor is 2% of AGI- Save receipts!! • Retains the alternative minimum tax for individuals with higher AMT exemption amounts from 2018 through 2025; fewer people will be affected by AMT • 529 college savings plan distributions can be used (within the annual limit of $10,000 per student) for private elementary and secondary school expenses and homeschooling expenses
  24. 24. Tax Cuts and Jobs Act #4 • Interest on home equity loans no longer deductible from 2018-2025; no grandfathering for existing home equity loans • Tax-deductible interest is capped on mortgage debt (called acquisition indebtedness) up to $750,000 on new mortgages – For mortgages taken out before December 15, 2017, the previous $1 million debt limit for mortgage interest remains • Chained CPI (consumer price index) will be used for future indexing, resulting in lower inflation adjustments than the previous CPI
  25. 25. Tax Cuts and Jobs Act #5 • The moving expense deduction is suspended from 2018 through 2025 with the exception of the moving and storage expenses of service members • The estate tax exclusion was raised to $11.2 million for individuals and $22.4 million for married couples (with proper planning to double the individual exemption; i.e., portability) from 2018 through 2025 • Student loan interest deduction up to $2,500 remains unchanged (above-the-line deduction even if you don’t itemize); ditto for education tax credits
  26. 26. Tax Cuts and Jobs Act #6 • The Affordable Care Act shared responsibility payment remains in effect for 2017 and 2018 and is $0 beginning in 2019 • Alimony is no longer deductible by spouses who pay or taxable to recipient spouses for divorce decrees signed after December 31, 2018 • Uninsured casualty losses can only be deducted if they are attributable to a federally declared disaster and exceed 10% of AGI • TCJA slams NJ harder than any other state: er_than_any_other_state.html
  27. 27. What to Do About Your Income Tax Withholding? • Check your expected tax impact as a result of the TCJA with an online calculator: – – – calculator/ • Determine the change in your tax withholding starting with 1/26/18 paycheck; multiply amount by 25 • Compare the two numbers; adjust W-4 form as needed
  28. 28. What to Do About the SALT Cap? • Consider downsizing to a smaller home in your current town to have lower property taxes • Consider moving to another town that has lower property taxes (Trenton, NJ to Morrisville, PA) • Suck it up and pay more federal income tax
  29. 29. What to Do About the Loss of Business Expense Deductions? • Build unreimbursed (and now non-deductible) expenses into program registration fees (if related to a program) • Build expenses (e.g., travel) into grants or Foundation gifts to deliver programs or conduct research • Build up sundry account balance (honoraria, speaking fees, etc.) to pay now non-deductible expenses • Say “no” to actions that require unreimbursed, non-deductible expenses (e.g., hold a teleconference instead of driving to NB) • Establish a consulting business (consistent with RCE policies) to deduct expenses against (e.g., professional dues) • Suck it up and pay now non-deductible employee business expenses fully out-of-pocket (i.e., pay more income tax)
  30. 30. What to Do About the Loss of Charitable Contribution Deduction? • “Make Yourself Whole” Strategy- Give what you used to give out-of-pocket (i.e., after taking tax deductions)- now that you can no longer itemize • Donate appreciated assets instead of cash (to avoid capital gains taxes) • If over 70 ½, donate from an IRA (so RMD does not count as income to the donor) • “Bunch” donation funds into target years, using a donor-advised fund to distribute funds to charities
  31. 31. Income Tax Resources
  32. 32. Recommended Resource “The Bible”: Annual Limits Relating to Financial Planning (College for Financial Planning):
  33. 33. Federal Tax Rates Rutgers Cooperative Extension Tax Information web page:
  34. 34. Nerd’s Eye View Blog Post For a through description and analysis of the Tax Cuts and Jobs Act, review the blog post Individual Tax Planning Under the Tax Cuts and Jobs Act written by Michael Kitces.
  35. 35. TCJA Tax Law Calculators • Tax Bill Calculator: Will Your Taxes Go Up or Down? (The New York Times): calculator.html?em_pos=small&emc=edit_up_20171218&nl=u pshot&nl_art=0&nlid=77794120&ref=headline&te=1 • Tax Calculator: What Tax Reform Means For You (Fox Business): calculator-what-tax-reform-means-for.html • Be sure to check the underlying assumptions! • You will get a rough estimate-not an exact number
  36. 36. TCJA Tax Law Resources • Congress Passes Sweeping New Tax Legislation (Iowa State University): legislation • Details of the Conference Report for the Tax Cuts and Jobs Act (Tax Foundation): act/ • Preliminary Details and Analysis of the Tax Cuts and Jobs Act (Tax Foundation): analysis/ • Tax Cuts and Jobs Act Summary (CCH Incorporated and Wolters Kluwer): • The Final GOP Tax Bill is Complete. Here’s What Is In It (The Washington Post): gop-tax-bill-is-complete-heres-what-is-in-it/?utm_term=.b82bad4b0124
  37. 37. Any Questions About the TCJA?