Read On … to Learn How It Affects Individuals and Businesses
Seems like it was a long time coming, but the promised revisions to the U.S. tax code became a reality just shy of Christmas. On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act. This Act is the most significant revision to the U.S. tax code in 3 decades and is expected to impact virtually every American taxpayer.
So with no attempt at predicting the future of how the provisions of the revised tax code will play out, in this article we’ll take a look at what we know as it affects both individual taxpayers and businesses.
Our objective is to summarize the new provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances. Certainly, that may be a prudent step on your part as the tax code revisions likely will affect your strategies to maximize benefits under the new law for you and your family.
This article is intended only as a review of the new law’s highlights. The details are beyond the scope of this piece so seeking advice from a professional tax expert is advised.
Now, as promised, let’s examine the tax rates, tax deductions, exemptions and tax credits provided for in the Tax Cuts and Jobs Act for both individual taxpayers and businesses.
Note: Most individual changes are effective January 1, 2018 and will expire at the end of 2025. Unless Congress passes another law prior to then, the old tax code provisions will be reinstated.
Individual Income Taxes
The Act retains the seven income tax brackets of the previous tax code, but with reduced tax rates for individuals in all brackets but one. The net effect of these reductions will be enjoyed by employees as they see reduced employer payroll withholding and larger take-home pay beginning with their February 2018 paychecks.
Comparison of New Tax Rates vs. Old
Note: Capital gains rates remain unchanged under the new law.
• Standard deduction doubled from $6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000. This, coupled with the changes to itemized deductions, is likely to lead to more taxpayers taking a simplified approach to filing, i.e. electing the standard deduction.
• Mortgage interest deduction limited to the first $750,000 of the loan; permitted on first or second home; interest on loans up to $1 million initiated prior to December 15, 2017 grandfathered
• Home equity loan interest eliminated
• State and local income tax, sales tax and real property tax deductions limited to $10,000 in the aggregate
• Miscellaneous itemized deductions eliminated; includes employee business expenses and investment advisor fees
• Charitable contributions deductions are retained for those taxpayers able to itemize deductions
• Deduction for medical expenses increased to 7.5 percent or more of income in 2017; 10% in 2019.
• Alimony payments no longer deductible for new divorces beginning in 2019
• Casualty losses to personal property no longer deductible unless covered by specific federal disaster declarations
• Personal exemptions of $4,150 eliminated
• Estate tax exemption doubled to $11.2 million for singles and $22.4 million for couples
• Alternative minimum tax exemption increased from $54,300 to $70,300 for singles; from $84,500 to $109,400 for joint filers
Individual Tax Credits
When compared to tax deductions, tax credits yield the better tax savings. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.
For example, assume you or your business spends $5,000 that results in a tax deduction. That will reduce your taxable income by $5,000. In a 25% tax bracket, you would save $1,250 in taxes.
Now compare that with a $5,000 tax credit. That amount is subtracted from the amount of tax owed as opposed to an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $5,000 tax credit!
• Child tax credit increased to $2,000 from $1,000
• American Opportunity Credit and Lifetime Learning Credit remain unchanged
• Credit of $500 for each non-child dependent.
Obamacare tax on those without health insurance repealed beginning in 2019
• Corporate tax rate lowered from 35 percent to 21 percent
• Alternative Minimum Tax eliminated
• Pass-through business deductions - up to 20 percent of business related income; applies to partnerships, S corporations and sole proprietorships with some limits and exceptions
• Section 179 deductions for depreciable personal property permitted in one year rather than amortizing over several; maximum amount increased to $1 million per year
• Bonus depreciation now available on both new and used property
• Vehicle depreciation cap is increased and indexed for inflation; new limits are $10,000 (year 1); $16,000 (year 2); $9,600 (year 3); $5760 per year thereafter until cost is recovered
• Entertainment expenses - 50 percent deduction of business-related food and beverage expenses retained; no deduction for entertainment and membership dues
• Corporate interest expense deductions limited to 30 percent of income
• Other deductions that mainly pertain to large corporations
Again, the tax code revisions likely will affect your strategies to maximize benefits under the new law for you and your family. Our objective is to summarize the new provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances.
That said, if you “thirst for knowledge” Click here to read the Act in its entirety.
Alternatively, a time-saving and less stressful approach is to give us a call or drop an email to schedule a time to review the specifics of your unique situation and develop an optimum tax strategy that benefits you and your family.