4th Quarter 2017 Investment Newsletter 

Tax Reform Summary 

  • The tax changes mentioned below take effect in 2018, unless otherwise noted. Many individual tax changes will sunset on December 31, 2025, while corporate tax changes are permanent.

2018 Ordinary Income Tax Brackets Restructured; Capital Gains Rates Retained

  • Tax brackets for ordinary income are reconfigured and many taxpayers will benefit from a lower marginal bracket. Favorable tax rates for long-term capital gains and qualified dividends remain unchanged; also unchanged are both the net investment surtax of 3.8% and the Medicare surtax of 0.9%.

Standard Deduction Doubled; Personal Exemptions Eliminated

  • The standard deduction increases to $12,000 for single and $24,000 for joint filers. Personal exemptions are eliminated.

Changes to Itemized Deductions

  • State and Local Tax Deduction Capped – Joint and single filers may deduct up to $10,000 in combined: 1) property taxes and 2) state & local income taxes or sales taxes.
  • Mortgage Interest Deduction Adjusted; Home Equity Interest Deductibility Limited – Mortgage interest is deductible on $750,000 of debt on new mortgages for joint and single filers. Deductibility for mortgages existing before 12/15/2017 are not affected. Further, home equity loan interest will no longer be deductible unless those loan proceeds have been used to acquire, construct or substantially improve the home.
  • Changes to Charitable Contribution Deductions – The limit for cash donations to public charities increases from 50% to 60% of Adjusted Gross Income. Payments made to a college or college athletic department in exchange for the right to purchase athletic event tickets are no longer deductible.
  • Temporary Reduction in Medical Expense Deduction Threshold – The threshold to claim a deduction for medical and dental expenses drops from 10% of Adjusted Gross Income to 5% for all taxpayers (not just those over 65). Unlike most provisions of the bill, this change is retroactive to include 2017 tax returns, but reverts back to 10% in 2019.
  • Miscellaneous Itemized Deductions Eliminated – Common miscellaneous itemized deductions that will no longer be deductible include tax preparation expenses, investment management fees and unreimbursed employee expenses.

Estate, Gift and Generation-Skipping Lifetime Exemptions Doubled

  • The exemption for estate, generation-skipping and lifetime gifts about doubles to ~$11.2 million per person (~$22.4 million per married couple), and continues to be indexed for inflation. However, the increase is set to expire after December 31, 2025, when it will revert back to an inflation-adjusted $5.6 million.

Additional Changes

  • Child Tax Credit Expanded – The child tax credit increases to $2,000 per qualifying child under 17. More families benefit, as the credit phase-out is increased to $400,000 of Adjusted Gross Income (MFJ) from $110,000 currently.
  • Use of 529 Plans Expanded to K-12 – Up to $10,000/year per student can be distributed tax-free from 529 plans to cover the qualifying expenses of public, private or religious elementary and secondary school.
  • Alternative Minimum Tax (AMT) Impact Reduced– AMT remains for individual taxpayers, but fewer will pay it, as the AMT exemption increases and is not phased out until income exceeds $1M for joint and $500,000 for single filers.
  • Health Care Mandate Repealed – The Affordable Care Act insurance mandate will be repealed as of January 1, 2019.

New Deduction for Pass-Through Income

  • A taxpayer with income below $315,000 (MFJ) or $157,000 (Single) may generally deduct 20% of income received from certain “pass-through” entities (sole proprietorships, partnerships, limited liability corporations and S-corporations). This deduction can be utilized whether the standard deduction or itemized deductions are claimed.
  • For individuals with income in excess of above amounts, the pass-through deduction will be subject to limitations based on W-2 wages paid or capital investment in the business.
  • For individuals with pass-through income from service businesses (including health, law, accounting and consulting), the 20% deduction will be completely phased out at $415,000 (MFJ) or $207,500 (Single), regardless of W-2 wages paid or capital investment.

Changes for Corporations

  • Top C-Corporation tax rate falls from 35% to 21%. Corporate alternative minimum tax (AMT) is eliminated.

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Market Index Returns QTR 4 2017
S&P 500 (Large Cap)     6.6%  21.8%
Russell 2000 (Small Cap)      3.3%  14.7%
MSCI International Index      4.3%  24.8%
MSCI Emerging Markets      7.5%  37.8%
DJ US REIT Index (Commercial Real Estate)     2.0%   3.8%
DJ Commodity Index     4.7%    1.7%
1-3 Year Bond Index     -.2%     .9%
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