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Tax Reform & Your Life: What's Changed?

Plenty. Here, tax expert Andrew Friedman, principal and founder of The Washington Update, provides insights on how the new law’s provisions could affect your financial life. Use them to help you plan for the conversations you’ll want to have with your tax professional and financial advisor.

By Andrew Friedman

"WILL I PAY MORE OR LESS THAN I DID BEFORE?" Now that the tax bill is law, that’s the big question on everyone’s mind, followed quickly by "Does it make sense for me to itemize or should I take the new higher standard deduction?”

As principal and founder of The Washington Update, Mr. Friedman is not affiliated with Merrill Lynch. Opinions provided are his, do not necessarily reflect those of Merrill Lynch and may be subject to change. Neither Merrill Lynch nor its advisors provide legal, tax or accounting advice. Please consult your tax advisor about the insights provided here.1

Because the new tax law has provisions that can affect decisions across your entire financial life, getting to the answers is likely to be a complex process—and contain some surprises. While the standard deduction has doubled to $24,000 for married couples and $12,000 for single filers, many taxpayers may find new limits on itemized deductions painful. In other words, the provisions contain pitfalls, as well as potential opportunities.

Here is a big-picture look at how the new law might affect seven major areas of your life. For a more detailed analysis of the tax law’s potential effect on your finances, you may find it helpful to read my whitepaper, “Tax Reform Accomplished: How Does the Legislation Affect Investors and Businesses?” And take some time to watch “The Markets, Tax Reform & Your Financial Life,” a webcast where I join several other experts in a detailed discussion. Before making any decisions related to taxes, be sure to discuss the implications with your tax professional.


What’s changed. Starting in 2018, if you buy a new home, you can deduct interest on only $750,000 of debt, down from $1 million. Interest paid on mortgage debt on up to two new residences is eligible for this deduction, as long as total debt on the two homes doesn’t exceed this limitation. The deduction for your state and local income and property taxes is capped at a total of $10,000.

What that could mean for you. The new law won’t affect interest deductions on existing mortgages. Yet the new, lower cap on mortgage size could change how much you can afford to spend on a new home. And, if you sell, it could limit the prospective pool of buyers and may affect the value of your home.

If you’re a prospective buyer with a substantial amount of cash on hand, it might make sense to use some of that cash to keep your mortgage value under $750,000—though that’s something you’ll want to discuss first with your tax specialist and your financial advisor. Depending on your situation, you might even consider making an all-cash purchase, and then claiming the increased standard deduction on your tax return.


What’s changed. Families saving for their children’s education using the popular 529 tax-advantaged college savings plans may now make federal tax-free withdrawals up to $10,000 per year per designated beneficiary to pay private or religious elementary or secondary school tuition for the beneficiary. (State tax treatment may vary.) Under the old rules, tax-favored 529 plan distributions could be used only for higher education expenses.

What that could mean for you. This new provision offers greater planning flexibility and another potential incentive to start saving early for your children’s or grandchildren’s education.





What’s changed. Not much is different when it comes to 401(k) accounts and other tax-advantaged ways to put money away for retirement. One exception: you’ll no longer be able to “recharacterize,” or undo, a conversion of a traditional IRA to a Roth IRA.

What that could mean for you. If your paycheck grows, thanks to lower income taxes, that extra money could be a pain-free way to contribute more to your retirement plan. However, many affluent individuals may find their overall taxes the same or higher than before, thanks to reduced itemized deductions. For those people, it is even more important to make deductible contributions to tax-favored retirement accounts. They should consider maximizing retirement plan contributions, and may want to speak to their tax advisor about other ways to delay income until retirement, when they may be in a lower tax bracket.

The new law could also influence where you retire, or the size of the home you retire to. Depending on your situation, given the new restrictions on itemized deductions, you could be better off retiring to a place with no state income tax, or choosing a smaller home with a lower mortgage.


What’s changed. For 2017 and 2018, most taxpayers can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. In 2019, that threshold rises back to the previous level of 10%. Also, starting in 2019, the new law eliminates the Affordable Care Act (ACA) individual mandate—and with it, the penalty tax imposed on those who chose not to buy insurance.

What that could mean for you. The non-partisan Congressional Budget Office has concluded that eliminating the penalty may mean fewer healthy people buy insurance. Fewer health insurance participants could mean rising premiums. Yet if you already have health coverage through work, the change may have little immediate impact.

Meanwhile, the temporary 7.5% income threshold for deductions increases the amount of unreimbursed medical expenses you could be able to write off. If you anticipate a large medical expense and you can control the timing, you may want to consider incurring those expenses in the next couple of years. Rising health costs underscore the value of planning ahead, and you might also consider putting any additional income—either from tax savings, a pay hike, or bonus money—into a tax-advantaged tool such as a health savings account. Again, check with your tax professional.


What’s changed. The federal estate tax exemption nearly doubles, to $22.4 million for married couples in 2018, indexed annually for inflation.

What that could mean for you. You can now potentially leave more to those you love without having the gift diminished by taxes. But don’t assume you’ll no longer need to think about estate planning. Minimizing taxes is just one reason for planning. You should work with specialists, including your legal and tax advisors, to determine what trusts or other tools will help you preserve, protect and control the assets for the people you care about, and to help ensure that your assets go to the people you designate at the time you want them to receive funds. Keep in mind that the higher exemptions are set to expire at the end of 2025.


What’s changed. By doubling the standard deduction—and by eliminating or curtailing certain itemized deductions—the new law is expected to cause fewer taxpayers to itemize. And if you don’t itemize, you can’t write off charitable gifts. One piece of good news for philanthropists and charities: taxpayers who continue to itemize will be able to deduct charitable contributions of up to as much as 60% of their adjusted gross income2, up from 50%.

What that could mean for you. Deciding to take the standard deduction doesn’t mean you’ll stop giving, but it could affect the amount you give each year. Work with your tax specialist and financial advisor to determine how philanthropy now fits with your other financial goals.

One tax-smart approach might be to pool several years' worth of charitable donations into a single contribution to a donor-advised fund (DAF). That amount is deductible in the year that you make your pooled contribution to the DAF, and it may provide a tax benefit to the extent that your pooled contribution helps you exceed the new standard deduction. The DAF can then distribute the contributed amounts to your charities over the succeeding years.


What’s changed. The bill enables many small business owners to deduct 20% of their qualified business income, effectively reducing their tax rates. However, the owners of many service businesses—such as lawyers, physicians, accountants and others—cannot claim any portion of this deduction if their joint income with a spouse is $415,000 or more.

Small businesses will also now be able to deduct the full value of capital assets put into service after Sept. 27, 2017 and before the start of 2023. In addition, the amount small businesses may expense immediately has been permanently increased to $1 million, with the expense deduction phasing out beginning at $2.5 million.

What that could mean for you. Say your small business earns $200,000 a year in qualified business income. Deducting 20% could reduce your taxable income to $160,000. But because the small business provisions are among the most complex parts of the tax bill, before taking any action, be sure to discuss all the ins and outs with your tax specialist.

In fact, consulting your tax advisor is just about the best piece of advice I could give anyone.

3 Questions to Ask Your Financial Advisor

  1. If I find that my taxes are lower, how can I best put the extra money to use to help me pursue my financial goals?
  2. How much can I afford to devote to charitable giving each year if I don’t claim a charitable deduction?
  3. What can I do to prepare for potentially higher health care costs?

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1 Andrew H. Friedman, principal and founder of The Washington Update, is an outside tax authority, and is not affiliated with Merrill Lynch or any of its affiliates.
2 Computed without regard to net operating loss carryforwards

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Always consult your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.

This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or financial instrument. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of issue.

Bank of America Merrill Lynch is the marketing name for Retirement Services business of Bank of America Corporation.

Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation.   Equal Housing Lender. Credit and collateral are subject to approval. Terms and conditions apply.

Before you invest in a Section 529 plan, request the plan’s official statement from your Merrill Lynch Financial Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are available only for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

This material should be regarded as general information on Healthcare considerations and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.


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