Tax plan: Everything financial advisers need to know about the final bill

The latest version has many changes from current law that would affect advisers and clients

Dec 18, 2017 @ 2:22 pm

By Greg Iacurci

After days of negotiations, Republican leaders aim to present a final tax bill to Congress for a vote this week, in hopes of getting it to the president's desk for signature by Christmas.

The bill — the Tax Cuts and Jobs Act — reconciles some of the substantial differences in the Senate and House legislation, and contains some important provisions for financial advisers and their clients.

Here are the bill's highlights for financial advisers, reflecting the 2018 tax year. Most changes on the individual side would revert to current law after 2025 unless extended by Congress.


The plan maintains the current seven marginal income tax brackets. There are several changes, including a cut to the top rate. Here are the breakouts:


10% ($0-$9,525); 12% ($9,525-$38,700); 22% ($38,700-$82,500); 24% ($82,500-$157,500); 32% ($157,500-$200,000); 35% ($200,000-$500,000); and 37% ($500,000+).

(Current law: 10% ($0-$9,525), 15% ($9,525-$38,700), 25% ($38,700-$93,700), 28% ($93,700-$195,450), 33% ($195,450-$424,950), 35% ($424,950-$426,700) and 39.6% ($426,700+)).


10% ($0-$19,050); 12% ($19,050-$77,400); 22% ($77,400-$165,000); 24% ($165,000-$315,000); 32% ($315,000-$400,000); 35% ($400,000-$600,000); and 37% ($600,000+).

(Current law: 10% ($0-$19,050), 15% ($19,050-$77,400), 25% ($77,400-$156,150), 28% ($156,150-$237,950), 33% ($237,950-$424,950), 35% ($424,950-$480,050) and 39.6% ($480,050+)).


The bill provides a 20% tax deduction for pass-through income. Pass-through businesses, such as partnerships, S corporations and sole proprietorships, are ones in which the owners pay their business taxes on their personal tax returns.

However, there are some limitations: The 20% deduction is capped at the greater of: (a) 50% of wage income paid to employees and reported on a W-2, or (b) 25% of wage income plus 2.5% of the cost of tangible, depreciable property owned by the business. Further, the deduction generally doesn't apply to several service businesses, such as those in financial and brokerage services.

These limitations don't apply to those with income less than $157,500 for individuals and $315,000 for couples. The limitations phase in over a $50,000 range ($100,000 for couples).


Long-term capital gains tax rates remain the same, at 0%, 15% and 20% (plus a 3.8% tax on net investment income for high-income taxpayers). However, the income breakouts are slightly different from current law: 0% (applies to taxable income of less than $77,200 for couples); 15% (over $77,200); 20% (over $479,000).

Also, the controversial "first-in, first-out" (FIFO) provision from the Senate bill isn't in the final bill.


The bill preserves the AMT, which ensures individuals pay a minimum level of tax, but increases the exemption level so the tax would apply to fewer individuals. The bill raises the exemption amount to $109,400 for couples (from $86,200) and $70,300 for singles (from $55,400).

The exemption phases out after $1 million for couples and $500,000 for singles (up from $164,100 and $123,100, respectively).


Doubles the estate-tax threshold. The 40% tax would apply to estate values above $11.2 million for individuals, and $22.4 million for couples.


Caps the deduction for interest on mortgage debt of $750,000 for homes purchased after Dec. 15, 2017. Existing mortgages are grandfathered under the bill, meaning they would retain the current $1 million cap.

Eliminates interest deduction on home-equity loans.


Taxpayers can deduct up to $10,000 in state and local taxes. (There's currently no cap.) They may choose how to use the deduction, through a combination of property and sales or income taxes. The threshold isn't indexed to inflation.


All taxpayers may claim a deduction for unreimbursed medical expenses if they exceed 7.5% of adjusted gross income, a reduction from the current 10% (meaning more people would qualify).

The reduction only applies for the 2017 and 2018 tax years, and would revert to 10% thereafter.


Eliminates the ability to recharacterize a Roth conversion. Current law allows investors who convert a traditional IRA to a Roth account to undo that conversion within a certain time frame.

However, the bill wouldn't prevent an investor from recharacterizing a contribution to a Roth or traditional IRA.


Doubles standard deduction to $12,000 for individuals (from $6,350) and to $24,000 for married couples (from $12,700).

However, the bill also eliminates the personal exemption. The exemption reduces taxable income, beyond the standard deduction or itemized deductions, by $4,150. It phases out beginning at taxable income of $266,700 for singles and $320,000 for couples.


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