The New Tax Law Is Here: What To Expect
NOTE: The implications, complications and planning opportunities under the new tax law will be discussed in our upcoming workshops coming in January. For more information, click HERE.
President Trump has signed the long promised tax cut act into law. It cuts the corporate tax rate from 35 percent to 21 percent and drops the highest individual tax rate to 37 percent. In general, for individuals, it cuts income tax rates for a limited time period, doubles the standard deduction, and eliminates personal exemptions.
While the corporate tax cuts are permanent, as noted, the individual tax changes expire at the end of 2025. This raises the same prospect that occurred with the tax cuts under President George W. Bush, i.e., the so-called “fiscal cliff”. It will force some future Congress to either pass a new law or see higher taxes return for most Americans.
Here's a brief recap of some of the major changes:
Income Taxes for Individuals
The act keeps the seven income tax brackets but lowers tax rates in each of them. The promised three tax bracket simplification is not included. Employees should see changes reflected in their withholding in February 2018 paychecks. These lower rates will return to the higher 2017 rates in 2026 unless continued by a future tax law.
The new law also doubles the standard deduction. A single filer's deduction increases from $6,350 to $12,000. The deduction for joint filers increases from $12,700 to $24,000. While these changes also disappear after 2026, it is expected that at least during its duration, many more taxpayers will be claiming the standard deduction instead of itemizing.
The act eliminates personal exemptions. Currently taxpayers could subtract $4,150 from income for each dependent person claimed. With the elimination, families with numerous dependent children may pay higher taxes despite the Act's increased standard deductions.
The Act eliminates most itemized deductions. For example, moving expenses, except for members of the military, are gone. Those paying alimony can no longer deduct it after 2018, while those receiving it can. Also, many unreimbursed business expenses for employees, home-equity loan interest, and tax preparer fees are out.
It keeps deductions for charitable contributions, retirement savings and student loan interest.
It limits the deduction on mortgage interest to the first $750,000 of the loan. Fortunately, current mortgage-holders aren't affected even if they re-finance at levels below the $750,000 limit.
While originally eliminated under earlier versions of the new tax law, taxpayers can still deduct up to $10,000 in state and local taxes but must choose between property taxes and income or sales taxes. The impact is that many taxpayers in high-tax states like California will probably end up paying higher taxes.
Fortunately, for older clients with health issues, the Act expands the deduction for medical expenses for 2017 and 2018. It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income. Before the bill, the cutoff was 10 percent for those born after 1952. Those born before that year already had the 7.5 percent cutoff.
The Act repeals the penalty under the Affordable Care Act (aka Obamacare) on those without health insurance in 2019.
The Act doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. Like other individual tax law changes, this one also disappears after 2025.
The new law keeps the Alternative Minimum Tax but increases the exemption for both singles and joint filers. It, too, only lasts through 2025.
Tax Credits for Child and Parent Care
The Act increases the child tax credit from $1,000 to $2,000 and even allows parents who don't earn enough to pay taxes can to claim the credit up to $1,400.
It allows parents to use 529 savings plans for home schooling and tuition at private and religious K-12 schools.
For those caring for an elderly parent, the now law allows a modest $500 credit for each non-child dependent.
Business Taxes
While there are numerous provisions designed to benefit mostly larger corporations, here are some highlights:
The new law has been touted as not only a tax cutting law, but also a job creating law. To to this, the act lowers the maximum nominal corporate tax rate from 35 percent to 21 percent.
In perhaps the most complicated and convoluted part of the law, it raises the standard deduction to 20 percent for pass-through entities. However, this deduction ends after 2025 and is tied to income levels. Pass-through entities include sole proprietorships, partnerships, limited liability companies, and certain corporations. They also include real estate companies, hedge funds, and private equity funds.
It also allows businesses for a defined period to deduct the cost of certain new purchases in one year instead of depreciating them over several years. It does not apply to structures.
Want to learn more?
This law was rushed through Congress in a matter of weeks. This stands in stark contrast to the major tax cut laws under both Presidents Reagan and George W. Bush which each took many months. Accordingly, it is widely anticipated that the new law will have many unintended consequences, both positive and negative, depending on your circumstances.
Come to our upcoming January workshop to learn more about the new tax law. We will take an in depth review of the new law as well as to undertake a preliminary discussion about planning strategies you may wish to employ under the new law.
We will also keep our clients apprised of major future developments in our monthly newsletter and in blogs on our website. If you are not yet a subscriber and would like to become one, please call or email our office and request to be added.
