There’s no tax on any of these tips.
I’m sure you saw the headlines about the bill passed last week. For Washingtonians, it caps off a few months of pretty substantial tax updates related to financial planning. Let’s go over it:
The Federal Tax Bill
There are a ton of summaries out there created by capable, professional pundits, but here are five of the most impactful changes I see affecting my client base as a whole:
- Above all, the bill brings much-needed certainty in the tax planning world. Many of the tax changes put in place in 2017 were temporary and are being made permanent (‘permanent’ = ‘until they’re changed by a different Congress’). The most simple being tax brackets remain the same. This means we can plan things like Roth conversions, or how to tax-efficiently spend down retirement accounts, with more confidence. Moving forward, it’s still 10%, 12%, 22%, 24%, 32%, 35% and the final boss of tax brackets, 37%.
- Somehow, the bill engulfs the most chaotic aspect of financial planning, student loans, into an even deeper level of chaos I didn’t think was possible. Forgiveness programs survive, but future borrowers — especially graduate students — will face lower federal loan caps and likely tougher private terms. Expect the real impact to unfold over the next few years.
- The SALT (state and local tax) deduction expansion from $10,000 to $40,000 for joint filers may help Washingtonians who have big mortgages with big property tax bills. It also increases the paperwork burden for those who may need to track sales tax expenses to get additional deductions. For those who recently bought homes with high interest rates and have been disappointed to not get an opportunity to refinance yet, this one’s for you. (And be sure to book your appointment with your tax pro early)
- The federal estate tax exemption moves up to $15 million for individual and $30 million jointly. There was real worry that this exemption was going to revert back to much lower levels, potentially forcing more Washingtonians to have to plan for future federal estate tax impact. For now, only households with very high net worth will need to continue engaging with their estate attorneys on the federal side. The state estate tax is another story — see below.
- One piece of relief for working families with young children (of which I know there are many receiving this message), is the long-overdue expansion of the Dependent Care FSA contribution limit from $5,000 to $7,500. This doesn’t move the needle super far, but it’s progress and should put some money back in the pockets of those who utilize DCFSAs.
Tyler’s note: I’d be remiss if I didn’t mention that the bill has clear winners and losers. If you’re reading this then it’s likely you are part of the group disproportionately receiving the upside benefits. But you won’t have to look far or for very long, perhaps next door or within your own extended family, to see how the benefits were paid for. I keep it pretty politically neutral in these parts, but I don’t think it’s political to point out that our representatives spent their time “punching down” as they directed resources away from those who aren’t reading blog posts like this one. That doesn’t bode well for the long-term viability of the system we live in.
Personal commentary: Over.
Washington State Updates
- We have an update to Washington’s estate tax. The exemption amount increases quite a bit to $3 million (nice!), but larger taxable estates see a much higher top rate at 35% (not so nice!). The takeaway is a constant refrain you’ve heard from me: This is a great time to update (or finally implement) your estate plan with an attorney if you’ve built up a significant net worth. Just let me know if you need help finding one or want to talk through the changes.
- Similarly, the state has a new top bracket for long-term capital gains over $1 million (almost exclusively targeted at sales of stocks/bonds). There continues to be an exemption that changes every year (currently $270K), but the top rate now maxes out at 9.9%, up from 7%. This is another tax change that needs to be planned around, and will significantly affect those sitting on large gains from equity compensation or other concentrated positions.
As always, feel free to send me a response if you want to discuss any of the items above. Or schedule a 15-minute meeting. Or politely nudge someone you know to set up an intro chat.