Americans face a slew of new rules during the first tax-filing season with the Tax Cuts and Jobs Act of 2017 in effect. Here’s a look at what has changed for investors:
No deduction for investment expenses
For taxpayers who itemize, the 2 percent miscellaneous itemized deduction was a handy catchall bucket for expenses such as investment fees and expenses and tax-preparation fees. It wasn’t easy to qualify for this deduction — your expenses had to top 2 percent of your adjusted gross income before you could claim them — but it was a nice option to have.
Lower tax rates on short-term capital gains
The new tax law trimmed income tax rates. That means short-term capital gains now also enjoy a slightly lower rate. “If you’ve got short-term gains — those are taxed as ordinary income — they get the benefit of lower rates now, so there’s a bit of a break there,” said Tim Steffen, director of advanced planning at financial-services firm Baird, in Milwaukee.
The 20 percent pass-through income deduction
If you’re a real estate investor there’s a chance the new 20 percent deduction on pass-through income will apply to you. The rules are complex, but generally, to qualify for this deduction as a real estate investor, the IRS wants you to be operating a business. The IRS has announced some “safe harbor” rules to help clarify the types of activities that will allow real estate businesses to qualify for the deduction.
No more Roth recharacterizations
Before tax reform, converting a traditional IRA to a Roth IRA came with an out: By the tax-filing deadline you could reverse, or “recharacterize,” your decision. In some cases, people were doing this if their investments in the account tanked between the time of the conversion and the tax-filing deadline. But now, no matter the reason, it’s no longer possible.
The kiddie tax is a little different now
Previously, children paid taxes at their parents’ rate on any unearned income more than $2,100. Under the new rules, the rates for estates and trusts apply on unearned income of more than $2,100. Children pay 10 percent on net unearned income up to $2,550; 24 percent on any excess up to $9,150; 35 percent on any further excess up to $12,500; and 37 percent on any excess above $12,500.