Winners and Losers in the New Tax Law (Including #MeToo)

On Dec. 20 Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA), and President Trump signed it shortly after. This law, most of which will become effective on Jan. 1, dramatically changes our tax environment. New financial planning strategies will emerge in the coming months and years.

Who wins?

Certainly, the biggest beneficiaries of this legislation are corporations with high effective tax rates, because the corporate rate is dropping from 35% to 21%. Certain pass-through businesses will also see major reductions. Some LLCs, partnerships, S Corps, and sole proprietors will be able to deduct 20% of their qualified business income. Essentially, they will be paying taxes on only 80% of their revenue.

Even #MeToo found its way into TCJA. In the past, businesses could deduct settlements paid for sexual harassment and sexual abuse claims. But now no deduction will be allowed for settlements that are tied to a nondisclosure agreement. That is probably a win for those victims who are more likely to be able to tell their stories.

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Who loses?

According to IRS data, about a third of taxpayers itemize their deductions on a Schedule A. That figure is likely to drop to below 10%. In the early years of a mortgage? In a state with high income taxes or high property taxes? Charitably inclined, but not uber wealthy? I’m sorry. You are likely to be a victim of the TCJA. Your tax return may be easier next year, but it is likely that the new standard deduction is higher than the amount you would be able to itemize. When you pair that with the elimination of the personal exemptions, many of you will see a higher tax bill.

As mentioned above, the personal exemptions are going away. That means for a family of three or more, the benefit of the standard deduction is completely offset by the $4,050 deduction you used to be able to take for each person on the return. That means if you have two or more kids, you may actually be hurt by the new deduction/exemption amounts.

Let’s not forget the cost to the nation. It is estimated that this experiment will run up the already high national debt by another $1.5 trillion. Time will tell the impact of this.

What should I do now?

Itemized “lumping” is likely to be a strategy of the future. Because many people who previously itemized will no longer get above the standard deduction, it will make sense to itemize every few years and make all charitable contributions, major surgeries, etc. in those years. If you have some liquidity and think you fall into this boat, you may want to contribute to a donor advised fund before Dec. 31. This will give you the deduction in 2017 (if you itemize) but will allow you to direct those contributions to the charity of your choice down the road.