NEW TAX CUTS AND JOBS ACT
The much-touted new tax legislation became law just before the end of last year. The banner headline is a significant reduction in corporate tax rates, however, most of us are wondering how it will affect the “ordinary” taxpayer. One of the stated goals of the Tax Cuts and Jobs Act was to deliver tax savings while simplifying the tax code.
Tax Law Summary
Tax Rates: The Act cuts the highest individual tax rates to 37 percent from 39.6 (corporate rates from 35 to 21 percent). The corporate rate cut is permanent, but the individual tax rates are set to revert in 2026.
Standard Deduction: The standard deduction has been doubled ($12,000 single, $24,000 married filing jointly), which may eliminate itemized deductions for many filers. The standard deduction increase is tempered by the loss of personal exemptions ($4,050 each in 2017). As a result, it is currently estimated that 94% of tax payers will take the standard deduction.
Itemized Deductions: The new tax law eliminates most itemized deductions. This includes moving expenses, alimony, unreimbursed employee business expenses, home-equity loan interest, tax preparation and investment management fees. The law keeps deductions for charitable contributions and student loan interest. If you still itemize, the mortgage interest deduction is limited to the first $750,000 for new loans. Previously unlimited, now property taxes and state & local tax payment deductions are capped at $10,000.
Capital Gains Rates: There has been no change to the long-term capital gain rates structure – they are still taxed at rates of 0%, 15%, or 20%, depending on your tax bracket, while short-term gains are taxed as ordinary income. Under the Tax Cuts and Jobs Act, however, the three capital gains income thresholds don not match up perfectly with the tax brackets.Instead, they are applied to maximum taxable income levels. But bottom-line — your capital gains taxes will be the same as if there had been no tax reform bill.
Alternative Minimum Tax: The new law increases the amount of the exemption from AMT and also the phase-out threshold (Corporate AMT has been repealed). So, it is unlikely to ensnare families with less than $1 million in income.
Pass-Through Deduction: Most American businesses are organized as “pass through” companies in which the income from the business is “passed through” to the business owner’s individual tax return. The introduction of a new “pass-through income tax deduction” that allows S corporations, partnerships, LLCs, and even sole proprietorships to claim a 20% qualified business deduction will lead to an array of new tax planning strategies. While the new deduction works differently for specified service businesses (e.g. doctors, attorneys, and accountants), it is permitted for those who have less than $157,500 of taxable income (or married couples under $315,000), which creates appeal for forming small businesses and/or reshaping existing employee relationships into an independent contractor status instead.
Estate Tax Exemption: The Tax Cuts and New Jobs Act doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples.
Credits: The Child Tax Credit is doubled to $2,000 and the phaseout is increased from $110,000 to $400,000 for married couples. There is also a $500 credit for non-child dependents which will help those caring for elderly parents.
529 Plans: Savings from a 529 Plan can now be used for private and religious K-12 schools or for expenses related to home-schooled students.
Federal Income Tax Bracket and Rate Comparison
The income levels will rise each year with inflation, albeit more slowly than in the past.
Ultimately, how the bill affects each individual taxpayer will depend upon income, family size, state of residence, and home ownership (among other factors). Tax brackets are lowered for all taxpayers, yet with the changes in the standard deduction, itemized deductions, and other modifications, the bottom line savings remains a bit murky. The new tax rules are complex enough that it will likely take months or even years for all of the new tax strategies to emerge for individuals and families.
The impact on businesses is clearer, and there are planning opportunities to explore. We highly suggest that small business owners consult their CPA to discuss corporate structure and tax saving opportunities under the new bill.