Penn Wealth Publishing

2018.03.25 Penn Wealth Report Vol 6 Issue 01

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command & contRol tactical aWaReness 25 Mar 2018 Penn Wealth rePort voluMe 6 issue 01 7 Copyright 2018. All Rights Reserved. right Rates under the new tax law have gone down, while the income thresh- olds have gone up of education. That truly is an enormous change. Now, if we could somehow get school vouchers written into law, the edu- cation system in America would truly undergo a radical change for the better. The teachers' union will fight to the death against that change. One final note on education. There was fear-mongering surrounding grad school students who receive tuition assistance for teaching classes. One headline screamed "Graduate student tax bills climbing by 400%." The proposed change to these tui- tion waivers (making the tuition taxable as income) had no chance of making it into the final bill, so the fear-mongering was just that. The marriage penalty is gone Under the old tax laws, two single people living together and filing separate taxes would pay less than a married couple filing jointly, but with the exact same income as the two single filers. Under the new law, the "married filing jointly" income thresholds are exactly double the single thresholds, negating this thoughtless penalty. Capital gains taxes remain mostly the same There were some ugly ideas for the new tax plan either floating around in congress, or in the minds of fear-mongering journalists. One dealt with the way capital gains on investments are taxed. In the end, however, little changed: short-term capital gains on investments held less than one year before being sold will still be taxed at the investor's ordinary income rate. Taxes on long-term gains will be taxed at 0%, 15% (overwhelmingly most Americans), or 20%, depend- ing on the taxpayer's level of earned income. The mortgage interest deduction Talk about hyperbole. We were watching CNBC one day in early November, when the red-faced CEO of the National Association of Home Builders (NAHB) pro- claimed, "This (tax bill) will cause a recession!" Huh? Clients were calling in upset because they would no longer be able to deduct their home mortgage interest. Not so fast. There were changes to the mortgage interest deduction, but unless you are Jay-Z or Beyonce (yawn), with a $43 mil- lion mortgage on your new digs, odds are astronomically good that you won't be affected. If you have an outstand- ing home mortgage loan of $500,000 or less, you will still be able to deduct 100% of your mortgage interest on your taxes. But, suppose you are a member of the elite, and have a $1 mil- lion mortgage, here's what happens: you will still be able to deduct the interest from the first $500,000 of your loan, but not the interest from any amount over that half- a-million. A housing recession? Really? (Interesting observation here: According to the press, the tax cuts were only for the wealthy. So, how come it seems like the rich are the only ones getting hammered?) SALT in the wound for big earners in high-tax states It's bad enough that high-tax states like California, New York, and New Jersey charge their denizens a confiscatory tax rate, but now high-earners will also have limits placed on what they can deduct from their federal taxes. Under the new law, these individuals will only be able to deduct the first $10,000 of state, local, and property taxes on their itemized federal return. Until now, that amount has been unlimited. On the bright side, the law virtu- ally eliminates the alternative minimum tax, which should help the muni bond market. The corporate tax rate With respect to America's competitive standing in the global business community, we saved the best for last. Of all the devel- oped nations, the US had the most onerous tax rate on the planet. The 35% corporate tax rate not only dissuaded international companies from setting up shop in the US (hiring US workers), it encouraged US companies to set up their headquarters overseas, build new plants outside of this country, and keep cash earned globally outside the reach of Uncle Sam. It was a joke, with our global competitors laughing all the way to the bank. American enter- prise rejoice, those days are gone. The new 21% corporate tax rate had, quite literally, an immediate effect. Companies began announcing worker bonuses, pay increases, increased 401(k) matches, and a massive repatriation of cash held overseas. If you forget all the other goodies in the new tax law, this one com- ponent will have a positive effect on the US economy for years to come. Highlights of the Tax Reform Law The corporate tax rate drops from 35% to 21% Both bracket rates and income thresholds have become more favorable (see chart) The standard deduction for married couples filing jointly will nearly double, to $24,000. The child tax credit has been expanded, with a higher deduction amount and a higher income phaseout threshold. Medical deductions and student loan interest deductions remain intact. Furthermore, par- ents can now use 529 plans to pay for primary and secondary education costs. Mortgage interest deduction remains intact, through first $500,000 of home loan. The "marriage penalty," for all intents and pur- poses, has been eliminated. Big earners in high-tax states will feel the pinch with reduced state/local tax deduction Long- and short-term capital gains rates remain largely untouched The "death tax" exemption will be initially dou- bled, then the tax will be eliminated

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