What They Forgot to Tell You About the Tax Legislation
Published: Friday, 31 January 2020 | 11:53 AM ET
By: Ivory Johnson, CFP, ChFC, Founder, Delancey Wealth Management, LLC
My father once told me that there are two types of thieves: the ones who break into your house to steal your TV and the ones who convince you to sign on the dotted line. The tax legislation has been a tale of those receiving a tax break and others who have seen their obligation increase. Taxpayers cannot change their exposure in the short term, but they can certainly plan for the future.
What happened short term
It’s been well documented that the standard deductions increased, the tax brackets were more advantageous and the child tax credit doubled to $2,000 for joint couples earning up to $400,000. At the same time, the personal exemptions and tier II deductions such as union dues and unreimbursed business expenses went away, along with an unlimited deduction for state and local taxes.
Likewise, small businesses structured as an S-Corp, an LLC or a sole proprietor receives a 20% deduction on qualified business income up to certain thresholds. Updated bonus depreciation schedules also allow business owners to deduct 100% of equipment in the year they are placed in use and the permanent corporate tax rate is 21%.
What happens long term
The tax legislation is expected to add $1.9 trillion to the national debt over 10 years per the CBO and that assumes the tax breaks for individual taxpayers will disappear after 2025. There’s also no way to know if the benefits taken away will be reinstated. Furthermore, the tax brackets increase by chained CPI and not traditional CPI. In other words, if consumers believe Starbucks is too expensive, it’s assumed they will go across the street to buy a cheaper cup of coffee. As a result the tax brackets will grow at a slower rate than wage growth and are likely to serve as an imbedded tax increase.
So now what?
It would be safe to assume that effective tax rates for some individuals will increase after 2025, a time when the GAO predicts government debt will be in excess of $30 trillion. In fact, an increase to social security taxes is already being discussed in the Social Security 2100 Act in the House (bet you didn’t see that one coming). In any event, future deductions may or may not be more advantageous than current deductions and taxpayers may want to consider re-characterizing their future income.
Roth IRA’s do not offer a tax deduction and are not available to high wage earners, but the money grows tax deferred and can be withdrawn tax free after the age of 59 & ½. Permanent life insurance policies allow the cash value to grow tax deferred and the policy holder can borrow against it with no taxable consequences, which simulates the benefits of Roth IRA, but without the income caps.
Businesses that can maximize the bonus depreciation are allowed to carry forward any net operating losses, unlike a section 179 deduction. Non-qualified plans are also attractive for business succession plans because the business gets a tax break when the executive receives his/her benefits.
Fortunately, most concerns can be addressed with proper planning and so it’s best to speak with a tax professional to map out your strategy. The tax legislation has two dimensions. We would be well served to plan for both scenarios.
Ivory Johnson, CFP®, ChFC
Delancey Wealth Management, LLC
20 F Street, NW, Ste. 750
Washington, DC 20001
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