Let's talk about tax reform for a minute. In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) that significantly amended the previous tax code as it relates to both individuals and businesses. You can find a complete list of all the updates on the IRS's website, but here are a couple of key changes that may impact you.
Individual Income Tax Rates Reduced
The highest marginal tax rate was lowered from 39.6% to 37% for individuals with taxable income greater than $500,000 ($600,000 for married couples) [adjusted annually]. This doesn't necessarily mean you will be paying less in taxes because of some of the other changes, but it is a favorable change.
Estate Tax Exemption Increased
The estate tax exemption doubled to $11.2 million per individual and $22.4 million for married couples. For people with large estates, this creates a huge tax advantage for passing down wealth to younger generations.
Child Tax Credit Increased
The child tax credit was raised to $2,000 per qualifying child and a $500 credit is available for dependents who do not qualify for the $2,000 credit.
Charitable Deduction Limitation Increased
The limitation for cash contributions to public charities and certain private foundations increased to 60% from 50% of adjusted gross income (AGI). However, the new law disallows charitable deduction payments made for college athletic seating rights.
21% Corporate Tax Rate Reduced
Applicable to those of you who have corporations, TCJA reduced the U.S. federal corporate income tax rate from 35% to 21%.
Pass-Through Entity Income Deduction ("write-off") Added
Pass-through entities (such as S corporations, LLCs, partnerships and sole proprietorships) are companies whose income is not subject to taxes on the business level; instead the income "passes through" to the individual owner(s) of the company. Many pass-through entities may receive a 20% deduction against their income.
No Deduction for Unreimbursed Employee Business Expenses
Previously, athletes were able to deduct expenses like agent fees, training expenses, union dues, travel expenses and other expenses related to their employment, but under the new tax laws, these expenses are no longer deductible. This negatively affects nearly every professional athlete, however there are some planning strategies that may alleviate the effect of these lost deductions so coordinate with your financial and tax advisors to come up with a plan for you.
Cap on Mortgage Interest Deduction
The mortgage interest deduction is allowed for mortgages up to $750,000. Under the old laws, the cap was $1 million. Additionally, interest deductions on new home equity lines of credit are not tax deductible.
Limitation on State and Local Tax Deduction
Under the old laws, individuals who lived in states with high income tax rates or had high property tax bills could claim those taxes as a deduction on their federal tax returns. Under TCJA, these write-offs are now limited to only $10,000. This amendment will have a huge impact on individuals who live in states like New York and California where the state income tax rates are extremely high.
Please note that many of the provisions listed above are expected to expire after December 31, 2025.
Consult a Professional
This list is not meant to be all encompassing, but does highlight specific changes that are relevant to professional athletes and other high earners. Relocating your primary residence to save on state income taxes or establishing a separate entity for your marketing and licensing income might be good strategies for you. Of course, everyone's situation is unique so please consult a professional before making any decisions.
If you'd like to know more about the TCJA and how it may impact you, don't hesitate to reach out to Rosecrete. We will work with you and your tax advisor to come up with a strategy tailored to your situation.
Reggie D. Ford, CPA is the Founder and President of Rosecrete Wealth Management. Rosecrete provides personalized, comprehensive financial services to affluent and high net worth clients. Rosecrete focuses on sports, legal, and medical industries with a passion for helping younger generations with early retirement planning.
For a list of states in which I am registered to conduct securities business, visit my website at www.rosecrete.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing includes risk including potential loss of principal.