Market Direction: BULLISH alert
issued 11/10/2016
Tax reform has passed...
The
Tax Cut and Jobs Act was passed by Congress and will be signed by President
Trump. The final bill reflected some compromises and is substantially different
than the earlier House and Senate bills. The new law includes many expected
changes, some unexpected ones, and some changes that were expected but didn’t
make the cut. Here are the most important things that individual taxpayers need
to know.
1.
New individual tax rates and brackets
For
2018 through 2025, the new law keeps seven tax brackets, but six are at lower
rates. In 2026, the current-law rates and brackets would return. The temporary
rate brackets under the new law are as follows. Most folks will benefit from
the new rates, but some who are currently in the 33% marginal tax bracket will
find themselves in the 35% marginal bracket next year. This unfavorable change
will mainly affect singles and heads of households with taxable income between
$200,000 and $400,000.
However, the new lower rates on income below $200,000
will offset some or all of the negative effect of being in the 35% marginal
bracket.
Year-end
planning impact: Most individuals will benefit from year-end planning
moves that push income into next year and pull deductions into this year.
2.
No change in taxes on long-term capital gains and dividends
The
new law retains the existing 0%, 15% and 20% tax rates on long-term capital
gains and dividends.
Year-end
planning impact: These brackets are almost the same as what they
would have been under old law, with the only change being in the way the
inflation adjustment for 2018 is calculated.
Therefore, the traditional
year-end tax planning strategies for securities held in taxable brokerage firm
accounts still apply.
3.
No mandatory FIFO stock basis rule
Starting
next year, the Senate version of the tax reform bill would have forced you to
use the first-in-first-out (FIFO) method to calculate the tax basis of shares
that you sell from taxable accounts. If the price of the shares stair-stepped
higher as you bought them, having to use the FIFO method would have meant that
your taxable gain would be figured by treating the oldest and cheapest shares
as being sold first. That would maximize your gain and maximize the resulting
tax hit. Fortunately, this proposed change didn’t make the cut, so it’s
business as usual.
Year-end
planning impact: None. You need not sell shares before year-end
just to avoid the now-discarded mandatory FIFO stock basis rule. Good!
4.
Higher standard deductions, but no more personal and dependent exemption
deductions
The
new law almost doubles the standard deduction amounts, starting in 2018.
However, personal and dependent exemption deductions, which would have been
$4,150 each for 2018, are eliminated. Obviously, these changes will benefit
some taxpayers and harm others. If you have many dependents, you may not be
pleased.
5.
New limits on deductions for state and local taxes
Under
old law, you could claim an itemized deduction for an unlimited amount of
personal state and local income and property taxes. You could also choose to
forego any deduction for state and local income taxes and instead deduct state
and local general sales taxes.
Starting
next year, the new law limits your deduction for state and local income and
property taxes to a combined total of $10,000 ($5,000 if you use married filing
separate status). Foreign real property taxes can no longer be deducted. So no
more property tax write-offs for your place in Cabo. However, you can still
choose to deduct state and local sales taxes instead of state and local income
taxes.
Year-end
planning impact: Traditional year-end tax planning advice includes
prepaying state and local taxes that would otherwise be due early next year.
That way, you get a bigger deduction on this year’s return. However, the new
law says you cannot get any tax-saving benefit from using this strategy to
prepay state and local income taxes. Specifically, you cannot claim a 2017
deduction for state or local income taxes that are imposed for a tax year
beginning after Dec. 31, 2017. How this rule could be enforced is a mystery.
The good news: you can still prepay state and local property taxes before year-end
and claim a 2017 deduction. That could be a really good idea in view of the new
$10,000/$5,000 deduction limitation that takes effect next year. However, if
you will be an alternative minimum tax (AMT) victim this year, deductions for
state and local property taxes (prepaid or otherwise) aren’t allowed under the
AMT rules. So prepaying could do you little or no tax-saving good.
6.
New limits on home mortgage interest deductions
Effective
next year, the new law reduces the maximum amount of mortgage debt to acquire a
first or second residence for which you can claim itemized interest expense
deductions from $1 million (or $500,000 if you use married filing separate
status) to $750,000 (or $375,000 if you use married filing separate status).
However, this change doesn’t affect home acquisition mortgages taken out under
binding contracts in effect before Dec. 16, 2017 as long as the home purchase
closes before April 1, 2018.
Also,
the old-law $1 million/$500,000 limits continue to apply to home acquisition
mortgages that were taken out under the old-law rules and are then refinanced
after this year (as long as the refinanced loan principal doesn’t exceed the
old loan balance at the time of the refinancing). Starting next year, the new
law also eliminates the old-law rule that allowed interest deductions on up to
$100,000 of home-equity loan balances.
7.
No change in home sale gain exclusion rules
The
new law preserves the valuable break that allows you to potentially exclude
from federal income taxation up to $250,000 of gain from a qualified home sale,
or $500,000 if you are a married joint-filer. The earlier House and Senate
bills both included restrictions on this break, but none of the proposed
changes made the cut. So it’s business as usual. Good!
8.
Expanded medical expense deduction for 2017 and 2018
The
House version of the tax reform bill would have killed the itemized deduction
for medical expenses. Instead the new law preserves the deduction and actually
expands it to cover medical expenses in excess of 7.5% of adjusted gross income
(AGI) for 2017 and 2018 (the old-law deduction threshold for 2017 was 10% of
AGI).
Year-end
planning impact: Since it is now easier to exceed the
percent-of-AGI deduction threshold, consider loading up on elective medical
expenses, such as vision care and dental work, between now and year-end if that
would net you a bigger 2017 deduction.
9.
Education tax breaks preserved
The
new law leaves existing education-related tax breaks in place.
Year-end
planning impact: If your 2017 AGI allows you to qualify for the
American Opportunity higher-education tax credit (worth up to $2,500 per
qualifying undergraduate student) or the Lifetime Learning higher-education tax
credit (worth up to $2,000 per tax return and covering most postsecondary
education expenses including graduate school), consider prepaying tuition bills
that are due in early 2018 if that would result in a bigger credit on this
year’s Form 1040. Specifically, you can claim a 2017 credit for prepaying
tuition for academic periods that begin in January through March of next year.
10.
Other important changes and non-changes
•
Starting next year, you will not be able to reverse the conversion of a
traditional IRA into a Roth account. Under the old-law rules, you had until
October 15 of the year after an ill-advised conversion to reverse it and avoid
the conversion tax hit. At this point, it is not clear if this change would
prevent you from reversing a 2017 conversion by 10/15/18 or if would only
prevent you from reversing a conversion done in 2018 and beyond. So if you have
a 2017 conversion that you already know you want to reverse, get it reversed
before year-end to be on the safe side.
•
Unfortunately, the new law retains the individual alternative minimum tax (AMT),
but the AMT exemption deductions are significantly increased and phased out at
much higher income level, starting next year. For many folks AMT exposure was
caused by high itemized deductions for state and local income and property
taxes and lots of personal and dependent exemption deductions. Those breaks
were disallowed under the AMT rules. With the new limits in deductions for
state and local taxes, the elimination of personal and dependent exemption
deductions, and larger AMT exemption deductions, many previous victims of the
AMT will find themselves off the hook, starting next year.
•
Starting next year, the maximum child credit is increased to $2,000 per
qualifying child, and up to $1,400 can be refundable (meaning you can collect
it even if you don’t owe any federal income tax). In addition, a new $500
nonrefundable credit is allowed for qualified non-child dependents.
•
Starting next year, deductions for moving expenses and most miscellaneous
itemized expenses are eliminated.
•
Starting next year, itemized deductions for personal casualty and theft losses
are eliminated, except for personal casualty losses incurred in a
federally-declared disaster.
•
Starting in 2019, you will no longer be able to deduct alimony payments if they
are required by a divorce agreement entered into after 12/31/18. Recipients of
nondeductible payments won’t have to include them in taxable income.
•
Tax breaks for adoption expenses are preserved.
•
The tax credit for qualified plug-in electric vehicles is preserved. For
details on this credit, see: You can get a $7,500 tax credit for a new electric vehicle.
•
Starting next year, the unified federal gift and estate tax exemption will
basically double — to about $11.2 million or $22.4 million for a married
couple. Wow! That is indeed a tax break for the rich.
$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor
positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we
may issue advising a change in the current market direction. Stay tuned
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The all-time highs since our initial
recommendation to go LONG
this market. Here is how the markets have performed:
Stock Market
Direction Recommendation (9/21/2017)
|
||
Dow
|
up 2,493.21 points a 11.15% gain
|
12/20/17
|
Nasdaq
|
up 581.20 points a 9.05% gain
|
12/18/17
|
S&P 500
|
up 194.37 points a 7.77% gain
|
12/18/17
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Related Link: http://www.stockmarket-direction.com/
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