Filbrandt Reports

These Tax Code Changes Are Likely to Affect You

Volume 18, Issue 1a

Executive Summary

In this report, you will learn the following:

  • The changes in the Tax Cuts and Jobs Act of 2017 most likely to affect university professionals
  • Advantages of using a donor-advised fund to deal with itemized deduction changes
  • Why you need to review your existing estate plan now
  • New ways you can use 529 plans

The Tax Cuts and Jobs Act of 2017 produced the most sweeping changes in the U.S. tax code since the Reagan Administration. In recent interviews, Filbrandt & Company’s financial advisers shared what aspects of the law are likely to most affect university professors and physicians.

Changes in itemized deductions

The new law limits the ability to deduct state and local income taxes, including property taxes, to a combined total of $10,000. People in high-tax states will likely be affected most by this change, according to Financial Adviser Travis Cliff, because middle class and higher earners would usually surpass the $10,000 limitation. The new law also removes the ability to deduct home equity loan interest.

Meanwhile, the standard deduction has almost doubled. Previously couples filing a joint return had to have more than $12,700 in itemized deductions in order to itemize. Now you will need to have more than $24,000 in itemized deductions to benefit from itemization.

One strategy to consider is claiming the standard deduction and itemized deductions of more than $24,000 in alternating tax years, according to Financial Adviser Scott Kornstedt.

“We’ve had a lot of discussions with clients about the use of donor-advised funds where you can make a larger contribution in a given year,” he said. “Then the next year you look at taking the standard deduction, and then again in future years use the donor-advised funds for your charitable giving.”

A donor-advised fund allows its owner to make a charitable contribution, receive an immediate tax benefit and then recommend grants to be distributed from the fund over time. It is similar to a charitable savings account: a donor contributes to the fund as frequently as he or she likes and then recommends grants to a favorite charity when he or she is ready.

With a donor-advised fund, you can pool a few years worth of contributions together, take the aggregate deduction all in one year, then distribute the contributions over the next few years, Cliff said. 

Additionally, personal exemptions of $4,050 for each taxpayer and each dependent are eliminated in the new legislation. This change is expected to affect mostly larger families.

These Tax Code Changes Are Likely to Affect You

Federal estate tax exemption doubles

The new laws have retained and even improved certain rules relating to estate planning, according to Financial Adviser James Twesme.

The federal estate tax exemption was doubled from $5.5 million to $11 million per person, or $22 million per couple. This rule is set to expire in 2025. At that time, it will go back to the current level of $5.5 million. It is important to remember that this does not impact state estate or inheritance taxes, which should be considered any time you’re making an estate plan.

Bear in mind that your existing estate plan could have been crafted years ago based on a $1 million or $2 million exemption, and then it could have been updated to the $5.5 million exemption. Now that we’re at an $11 million per person exemption, that clearly impacts many established estate plans.

“Any estate plans that were crafted based on the lesser exemption levels definitely need to be reviewed,” said Kornstedt.

The estate tax exemption will reduce the number of people exposed to estate and gift taxes, an extension of the trend established in the afore-mentioned exemption increases.


These Tax Code Changes Are Likely to Affect You

Gift tax exclusion increases

The annual gift tax exclusion increased from $14,000 last year to $15,000 in 2018. This means you can make a $15,000 gift to anyone you wish with no income tax impact. People don’t necessarily realize that you can make a cash gift in excess of $15,000 per person. Any amount in excess of $15,000 will reduce the $11 million estate tax exemption, Twesme said, with no tax due at that time.

Changes in 529 plans

One overlooked aspect of the tax bill is the change made to 529 plans. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs.  Prior to this bill they could only be used for college expenses. Now up to $10,000 annually can be used for costs relating to elementary or secondary schools.

“A lot of the clients I work with have grandchildren attending private elementary or high schools,” Kornstedt said. “This change could be an opportunity to further fund those types of accounts with the thought they can be used for education costs preceding college.”

These Tax Code Changes Are Likely to Affect You

Step-up in cost basis remains

The new law retains an important provision: Heirs who receive an asset such as a stock portfolio or real estate will still receive a step-up in basis at the time of death. Basis is the value of the asset used to calculate a taxable gain. An example:

You purchased 100 shares of stock years ago at a total cost of $1,000. At the time of your death, the stock has appreciated in value to $5,000, and you will the shares to your daughter.

She would pay no tax at the time of your death. If she sells the shares one year later for $6,000, she would only pay capital gains tax on $1,000 – the difference between the $6,000 value when she sold the shares, and the $5,000 value at the time of your death.

Other changes

  • The number of tax brackets remains at seven, but the tax rate in most brackets is lower.
  • The mortgage interest deduction can only be taken on mortgages up to $750,000 (existing mortgages are grandfathered). This is down from $1 million previously.
  • The medical expenses deduction has been reduced from 10 percent of Adjusted Gross Income (AGI) to 7.5 percent of AGI for 2017 and 2018.

More changes ahead

Most of the reforms are temporary. They’re only set to be enforced for another eight years with the exclusion of the corporate tax cuts, which reduced the corporate tax rate from 35 percent to 21 percent.

“As with many other tax changes in the past, expect more changes in the future,” Cliff said.


Disclosure: To the extent that the information contained herein contains federal or state tax  issues, such information was not written or intended to be used, and cannot be used, for (1) avoiding federal or state tax penalties or (2) promoting, marketing and recommending to another party any transaction or matter addressed herein.

Volume 18, Issue 1a

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