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The Impact of New Tax Code on Financial Planning

It would be a difficult task to summarize all of the provisions of the Tax Cuts and Jobs Act (TCJA), the largest change to the tax code in 30 years. Here are the items that are most applicable to those concerned with how changes to the tax code will impact their financial planning. However, this is a tiny percentage of all TCJA provisions. There are more comprehensive discussions of the act available.

Personal Taxes

Most taxpayers will see at least some reduction in taxes. Some will see greater amounts. The primary benefit will be from:

  • Lower tax rates
  • Expanded tax brackets and/or
  • Favorable treatment on business income

Deductions and Personal Exemptions

  • State and local tax deductions are capped at $10,000.
  • Miscellaneous itemized deductions subject to 2% threshold are out.
  • Standard deductions have been increased to $12,000 single, $24,000 joint - nearly double from before.
  • Personal exemptions have been eliminated but there is an expanded child tax credit and new qualifying dependent credit to help with the loss of dependent exemptions. Many who itemized will now use the higher standard deduction (this is the only thing about the law that really achieves “simplification.")

Charitable Giving

This was not changed (actually, the cash contribution cap was expanded to 60% of adjusted gross income), but the above changes will affect charitable giving strategies. For those who were itemizing but will now use the standard deduction, there will be no deduction for charitable contributions. (For more, see: How the GOP Tax Bill Affects You.)

There are a couple of strategies available in this scenario. For clients over 70 1/2 who are taking required distributions from IRAs, consider using the qualified charitable distribution (QCD). A QCD allows for a distribution directly to a qualified charity and keeps the distribution completed out of income.

For anyone making charitable contributions who may be near itemizing, group two or more years of contributions into one year’s contributions. That will put you into itemizing territory that year and you can use the standard deduction the other year(s). If you want to spread out the actual gifts to your charity(s) as you would normally, consider using a donor advised fund (DAF) to collect the one year’s contributions and then use the DAF to distribute the funds.

Roth Conversions

The ability to re-characterize (undo) Roth conversions is out. Therefore, it will be important to be comfortable with the amount of conversion. For most, this will mean waiting until late in the year to estimate taxable income and then decide on a conversion amount. This also highlights the importance of taking advantage of opportunities, if it makes sense, while they exist. There was no warning that this was going away until the bills were being drafted and debated in November and December.

Alternative Minimum Tax

While there was talk (and strong hope) of repeal, the alternative minimum tax (AMT) is still with us. The good news is there is a higher AMT exemption. This, along with the reduction of certain itemized deductions, will greatly reduce the negative effect of AMT previously experienced by many taxpayers.

Business Taxes

Corporate tax rates have been flattened to 21%. Remember, corporations don’t pay taxes, people pay taxes. So this is a tax cost reduction to anyone dealing with the company (customers, employees, shareholders). Corporate AMT has been eliminated. 

Qualified Business Income 20% Deduction for Pass-Through Entities

If you don’t own a business, just ignore this. If you do, or may in the near future, this is a big deal. A discussion of this provision is way beyond the scope here and I believe there are some things that will need to be clarified with the qualified business income deduction. Much attention will be needed by business owners and their tax advisors in understanding how this deduction works in specific situations.

Estate and Gift Taxes

The estate and gift tax exemption has been doubled to $11.2 million per person. Even fewer people will be subject to these taxes, but remember the previous exemption is scheduled to return after 2025. This still requires planning attention for those estates between the old and new exemption, particularly if the estate is likely to grow into the future.

The Bottom Line

The Tax Cuts and Jobs Act is the largest change to the tax code in 30 years. A number of key provisions impact financial planning and need to be taken into account. (For more, see: An Overview of Itemized Deductions.)


Disclosure: Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.