The Tax Cuts and Jobs Act of 2017 is the first major tax overhaul since the Reagan era. Rather than simplifying the already 10,000-page tax code, Republicans took a different approach: they tweaked the taxation formula and did a balancing act by doing away with a few deductions.
They also gave the business community a 14% corporate tax reduction. What they did not do was simplify the federal tax code. The following are highlights of what the new bill means to individual taxpayers and the business community.
Tax Cuts for Individuals
Most individual tax payers will pay less. The previous 7 tax brackets are still here, but new percentages apply. The old brackets were 10%, 12%, 22%, 24%, 32%, 35% and 37%. New brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.60%.
Each new bracket results in a lower individual tax bite. For example, in 2017, a married couple filing jointly whose taxable income was $75,000 paid over $9,500 in income taxes. The same couple in 2018 will pay a little over $8,000.
Changes in Deductions and Credits
Increased standard deductions have been doubled. Many taxpayers who previously itemized their deductions will opt to take the standard deduction instead. Single filer deductions have increased from $6,350 to $12,000. Married couples filing jointly get a standard deduction increase from $12,700 from $24,000.
Tax credits for dependents have also been doubled. The child tax credit is doubled in 2018 to $2,000 for children under 17 along with higher earning caps for single parents ($200,000) and married couples ($400,000).
Then there’s the temporary credit for non-child dependents. The new law permits filers to take a $500 credit for each non-child dependent they are supporting. This might include a child 17 or older, or elderly parents.
Another change is the doubling of estate tax exemptions. The original plan was to eliminate all estate taxes. The surviving compromise was to double the 2017 exemptions of $5.49 million for individuals and $10.98 million for married couples.
4 Tax Breaks That Survived
1. Medical care expenses are still deductible.
2. Student loan interest, and teacher-purchased classroom supplies survived the 2018 law. Graduate students also continue to enjoy tax-free status of tuition waivers.
3. Homeowners who make a profit on a home sale will still be allowed to exempt $500,000 ($250,000 for single filers) from capital gains, under certain restrictions.
4. The electric car tax credit is still plugged in for a maximum credit of $7,500.
4 Tax Breaks That Will Go Away in 2018
1. The increase in the standard deduction is offset somewhat as the $4,050 personal exemption is eliminated in 2018.
2. Tax filers in states like California (7.5% sales and top marginal income tax of 13.3%) can no longer deduct the full amount of the taxes they paid to the state. State and local tax deductions are now capped at $10,000.
3. Homeowners who take out a new mortgage can now deduct up to $750,000 interest on their debt. The amount is down from the previous cap of $1 million. Current mortgage owners are unaffected by this change.
4. Finally, tax preparation costs, moving expenses for nonmilitary people, and alimony payments are no longer deductible.
On top of all this, the Obamacare health insurance mandate has been eliminated — and so has the penalty associated with not purchasing it. For tax year 2017, the tax penalty is 2.5% of the total household adjusted gross income, or $695 per adult and $347.50 per child to a maximum of $2,085.
Changes for Businesses
The corporate tax rate is going down dramatically.
While individuals definitely benefit from the new law, it does lean heavily towards corporations and business owners. For businesses and corporations, starting next year the corporate rate tax is cut from 35 to 21 percent. The bill also repeals the alternative minimum tax on corporations.
On the other hand, there are 3 other provisions on the new law that rein in or help the business community:
1. a 21% excise tax on nonprofit employers for CEOs who earn above $1 million
2. the elimination of tax write-offs for sexual harassment settlements
3. transition to eliminating federal taxes on companies earning incomes offshore
Regards,
Ethan Warrick
Editor
Wealth Authority