Our review of the 157-page bill yields two primary observations.
- The rules are favorable for the overwhelming majority of Americans.
- Most of these rules have been made permanent.
This is good news for the American People. Not only will we not suffer the increased tax burden that we were warned about, but we also do not have to put up with waiting for Congress to act every December before knowing the tax rules for the coming years.
Within the Act, there are three key provisions that impact just about anybody engaged in long-term financial planning. Here's a quick summary of each:
#1: Income Tax Rates
For 98% of Americas, federal income tax rates have not changed. This is great news compared to the pre-election tax banter that we endured last year. However, there are still some changes to be aware of. The first is the expiration of the Social Security payroll tax holiday. We are back to paying our fair share of Social Security tax that was temporarily discounted for the past two years. This amounts to an additional 2% on the first $113,700 that you earn. While none of us ever like to pay more tax this year than we did last year, it becomes hard to argue that we are serious about saving Social Security if we are unwilling to pay the original amount that the system prescribed. Also, itemized deductions will be phased out for taxable incomes of $250,000 for single tax filers and $300,000 for married filers. There is a new 39.6% tax bracket for taxable incomes of $400,000 for single taxpayers and $450,000 for married tax payers.
#2: Permanent Estate Tax Exemption
The estate tax exemption amount is now permanently set at $5,000,000 per individual and will be indexed for inflation. This means, that unless a married couple has a net worth north of $10,000,000, estate taxes do not need to be a major concern. However, there are still a lot of other good reasons to have an estate plan and it remains to be one of the most common gaps on people's financial checklist.
#3: Permanent Capital Gains & Dividend Tax Rates
Just like income tax rates, capital gains and dividend tax rates will remain the same for 98% of taxpayers - 15%. Taxpayers in the 39.6% bracket will pay 20%. However, there is a new investment surtax related to the Affordable Care Act (Obamacare) to be aware of. For single taxpayers of $200,000+ or joint taxpayers of $250,000+, there is a new investment surtax of 3.8% that will be applied to dividends, capital gains and interest income. The good news is that a little smart planning can go a long way toward minimizing or eliminating this tax burden for taxpayers near this threshold.
