By: Karen Hube, Barron's
December 23, 2017
How it adds up for individuals:
Ultimately, how the bill shakes out for each individual or family depends on income and wealth level, family size, which state you live in, and whether you own a home, among other factors.
Tim Steffen, director of advanced planning at Baird Private Wealth Management, ran various tax analyses for different hypothetical families around the country to understand the tax impact of the new law. He assumed incomes ranging from $100,000 to $1 million a year, and high-tax, low-tax, and no (income) tax states. “In nearly every scenario for all three states, taxable income went up under the new law, but the tax liability went down,” Steffen says.
At income levels of $100,000 and $500,000, his hypothetical families had the same federal tax burden regardless of whether they lived in a high, low, or no-tax state, because the cap on state tax deductions equalizes their situations.
Families in high-tax states get the least tax savings, because under current law they are paying the lowest federal taxes due to their large state income and property-tax deductions, so they feel the loss of those deductions the hardest.
At the $1 million income level, the loss of state tax deductions is more likely to cause an increase in tax owed, according to Steffen’s analysis. Consider a family of four in Westchester County, N.Y., with a $2 million home, a mortgage balance of $1.2 million, a state income-tax bill of $67,000, and a $40,000 property tax. Based on those and other assumptions, the family’s federal tax would be $275,675 this year, and $276,079 next year.
In Hillsborough County, Fla., a no-income-tax state, the family’s federal liability drops from $308,579 this year to $276,079 under the new law.
Generally, under the new plan, the greater the wealth level, the greater the tax savings. For most wealthy families, you have to look beyond just income taxes to understand their full benefit, says Matt Gardner, a senior fellow at the Institute for Tax and Economy Policy.
THE ESTATE TAX, while still in effect under the new bill, will kick in at much higher income levels thanks to a doubling of the exemption from the current $5.49 million for individuals to $10.98 million. Couples will be able to shelter $22.4 million from the estate tax.
MOST PLANNING OPPORTUNITIES will be next year. The increased estate-tax exemption will prompt a flurry of estate-plan revisions, and the change in tax rates on businesses warrants a hard look at how wealth is structured.
“We’re going to see pass-through owners asking if they should be structured as C corporations to take advantage of the new top 21% tax rate,” says Jim Wilhelm, director of SC&H Group, a tax consulting firm in Sparks, Md. Pass-through income is taxed at income-tax rates, up to 37% under the new law. Plus, corporations can still deduct state and local taxes under new rules, while pass-throughs can’t.
Folks with flexibility on how they claim their income will inevitably explore creating a pass-through entity to pay out their income, so they can get that new 20% deduction.
The varying new benefits and rates on individual, pass-through, and corporate income sets the stage for years of scheming and mining through the tax code for new ways to game the system, Wilhelm said.
Without the simplification of the tax code, it’s a different set of rules, but the same game.
Karen Hube, Barron's
December 23, 2017
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