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Merriman’s Take on Recent Tax Legislation

Merriman's Take on Recent Tax Legislation - Last month
Chris Waclawik

By Chris Waclawik, Wealth Advisor AFC®, CFP®
Published On 02/22/2018

In December, Congress passed sweeping tax changes, and the President signed them into law. This legislation will impact many tax planning strategies going forward.

This document summarizes some of the major provisions most likely to impact the families we work with. As always, your advisor can answer questions and provide guidance specific to you.

Most of the individual provisions will remain until 2025, after which they are scheduled to expire and revert to current law. Here are some key highlights of the legislation:

  • Income tax rates and capital gains tax rates: Most taxpayers will see slightly reduced tax rates starting in 2018. The existing seven tax brackets remain, but with slightly lower rates. The preferred rates on long-term capital gains and qualified dividends remain the same.
  • Increased standard deduction: Nearly doubles to $12,000 for individuals and $24,000 for joint filers. This increase comes with an elimination of personal exemptions.
  • State and local income and property tax (itemized deduction): Combined state and local income and property tax itemized deductions are capped at $10,000.
  • Elimination of miscellaneous itemized deductions: These include deductions for employee business expenses, tax preparation fees and investment advisory fees.
  • Roth recharacterizations eliminated: Investors can convert money from an IRA account to a Roth. Previously, that decision could be undone with a recharacterization. This legislation eliminates recharacterizations, forcing more careful planning around Roth conversions.
  • Alternative minimum tax (AMT) and estate tax: Both are retained, but with sharply higher exemptions, meaning fewer taxpayers are likely to be impacted. Taxpayers subject to AMT in recent years may be able to get some of that back in a credit on future tax returns.
  • Expanded child tax credit: Child tax credit increased from $1,000 to $2,000. More significantly for affluent households, the income phaseouts have increased considerably from $75,000 for individuals and $110,000 for married couples, to $200,000 and $400,000 respectively.
  • Deduction for “pass-through” entities: For owners of “pass-through” entities (including sole proprietorships, partnerships and S corporations), business profits may be eligible for a 20% deduction on the personal tax return.The tax changes for business income are complex, but also bring significant planning opportunities. These need to be addressed with a tax advisor on a case-by-case basis.
  • Repeal of the individual health insurance mandate: The bill repeals the requirement that individuals buy health insurance or pay a penalty. This individual mandate was part of the Affordable Care Act. No other parts of the ACA were impacted by this legislation.
  • Changes to 529 college savings accounts: Up to $10,000 per student can be used tax-free each year for K-12 school expenses. This can be for public, private or religious schools, and is in addition to existing college education costs.

Tax Planning Strategies

While an overhaul of this size is too large to address all the resulting strategies, there are a few key items for taxpayers to consider.

  • Itemized deductions: Because of the increased standard deduction and elimination or reduction of many itemized deductions, fewer than 10% of taxpayers are expected to itemize in the future, down from about 1/3 now.
  • Charitable contributions: Because fewer taxpayers will itemize deductions, charitable contributions will likely require more planning, even though there was no change in their deductibility. Charitable “bunching” with a donor advised fund (DAF) can allow multiple years of contributions (and their deduction) in a single year. Also, qualified charitable distributions (QCDs) may be even more useful for taxpayers who are no longer itemizing. Finally, removal of Pease limitations can increase benefits of deductible gifts for higher-income taxpayers.
  • Healthcare planning: The cost of healthcare is often an impediment to retiring before at 65 when Medicare kicks in. Since the ACA went into effect, subsidies have been available to help individuals below a certain income threshold pay reduced premiums. Many affluent retirees can qualify for this credit with some tax planning in advance.While this new legislation repeals the ACA’s individual mandate requiring individuals to buy insurance, the premium subsidy structure remains. The new tax law shouldn’t impact ongoing strategies.
  • Education planning: The ability to use 529 plans for K-12 and college expenses provides more planning opportunities. While exciting, there are some questions to be answered to maximize this new benefit.

What to Do Next

This is a large piece of legislation, with different tax implications for various taxpayers. We’ll have blog posts about more detailed strategies in the coming months. For now, some will want to continue with existing strategies – there were minimal changes to taxation of investments and pensions. Others – particularly those who own businesses, give to charity or are doing education planning – have more significant changes to consider.

Numerous provisions considered in earlier drafts didn’t make it into the final legislation, resulting in some confusion. Your advisor can discuss what these changes mean for you personally and determine whether any changes should be made to your overall financial plan. We encourage you to reach out if you have any questions.


No client or prospective client should assume this article serves as a receipt of, or a substitute for, personalized advice from Merriman, or from a legal or insurance professional. The client or prospective client is responsible for determining whether any strategy discussed is  appropriate or suitable for them based on their legal, financial, or tax situation. The client or prospective client should consult with a financial or tax professional regarding their specific financial or tax situation.

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Chris Waclawik

By Chris Waclawik, Wealth Advisor AFC®, CFP®

After college, Chris moved to South Korea where he worked for the army as a financial counselor. He helped everyone from 18-year-old service members getting their first real paychecks, to those approaching retirement, and saw the stress caused by spending too much money early in life, as well as the stress of sacrificing too much earlier on and missing out on the opportunity to really live fully. He became a financial advisor to help people find clarity in reaching goals and to work with them to find balance between planning for tomorrow and living fully today.

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