Ethan R. Okura
Hawai‘i Herald Columnist
In last November’s column, I wrote about the then-proposed federal Tax Cuts and Jobs Act. There were quite a few changes in the proposed legislation, which left many people in a state of confusion as the bill went through several revisions before finally being passed into law. Many of the changes initially proposed did not make it into the final bill as I had originally anticipated.
Fast forward to last month when I wrote about how the new law temporarily doubles the estate tax exemption. It now allows each of us to give away during our lifetime, or to pass away owning, up to $10 million (adjusted for inflation) without having to pay any gift or estate tax.
In this month’s column, I will cover some of the income tax aspects of the law and how they might affect you.
The previous rates for the various tax brackets were: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The new rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. With a few exceptions, most taxpayers will do better with the new brackets and rates.
Unfortunately, individuals with incomes over $157,500 will be bumped up from the 28 percent rate to the 32 percent rate, and those with incomes over $200,000 will be bumped up from the 33 percent rate to the 35 percent rate.
Among married couples filing jointly, only those making between $400,000 and $416,700 will pay more taxes. They will get bumped up from the 33 percent bracket to the 35 percent bracket.
Many people will be affected by several other big changes, including the doubling of the standard deduction to $12,000 for a single person, $18,000 for a head of household and $24,000 for a married couple filing jointly; and the elimination of many other deductions that were previously allowed, such as:
• Personal and dependent exemptions;
• Miscellaneous itemized deductions subject to the 2 percent floor, such as tax preparation expenses and employee business expenses;
• Personal casualty and theft losses;
• Alimony payments under new divorce decrees established after Dec 31, 2018; and
• Moving expenses (except for active-duty military who have orders to relocate).
Some deductions have been limited or modified, such as the $10,000 total cap on deductions for state and local income, sales and real property taxes paid. Home equity loan interest is no longer deductible, and interest on new mortgages taken out after Dec. 14, 2017, is only deductible for up to $750,000 worth of the mortgage principal borrowed. Interest on pre-existing mortgages that were new or refinanced before Dec. 15, 2018, will continue to be deductible for up to $1 million of the mortgage principal borrowed.
There are two positive changes in itemized deductions pertaining to charitable contributions and medical expenses. Donations to charities were previously limited to 50 percent of your adjusted gross income, or AGI. You can now deduct up to 60 percent of your AGI for charitable contributions. Medical expenses (doctor, chiropractic, psychiatric, dental and vision care; prescription medicines, glasses, contacts, hearing aids and dentures; and long-term care nursing home expenses) that are not reimbursed by any insurance are deductible to the extent that they exceed 7.5 percent of your AGI. Prior to this new tax law change, only medical expenses exceeding 10 percent of AGI would have been deductible for 2017 and on. The reduced 7.5 percent hurdle is good for 2017 and 2018. From 2019, only medical expenses over 10 percent of your AGI can be deducted.
The law also eliminates the tax penalty that was assessed under the Affordable Care Act (“Obamacare”) for those who did not purchase health insurance. The penalty will still apply for 2017 and 2018. However, starting in 2019, individuals can choose not to purchase individual health insurance and pay no tax penalty.
The final major benefit that will affect many small business owners is the 20 percent deduction on Qualified Business Income from a sole proprietorship, partnership or S-Corporation (or an LLC that elects to be taxed as any of the above). The rules related to the Qualified Business Income deduction are a bit complicated, but if you own or want to start a small business, you can benefit from some tremendous tax savings under this new deduction. Please see a qualified attorney or tax specialist to figure out how to best take advantage of this opportunity.
So, as you can see, this new tax law will result in many changes, most of which will expire at the end of 2025. After that, starting in 2026, most of these itemized deduction rules will return to their previous version, unless Congress acts to extend portions of this law.
Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.
This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.
See more articles by Ethan by visiting https://okuralaw.com/blog/