The Tax Cuts and Jobs Act
December 20, 2017
The Tax Cuts and Jobs Act was passed and signed on December 20, 2017. This is the largest major overhaul of the tax system in 30 years. Below are some of the highlights of the tax bill that will be effective beginning January 1, 2018. Many aspects will apply to you and many may not as each individual tax situation is different.
Please do not hesitate to contact us with any questions regarding your personal tax situation.
Income tax rates
While the Bill maintains the 7 income tax brackets, the rates have been lowered to: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Current rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The income level for each bracket has been increased meaning more income will be taxed at lower rates.
Standard deduction and personal exemptions
The standard deduction nearly doubles. The Bill increases the standard deduction to $12,000 from $6,350 currently for single filers; and to $24,000 from $12,700 currently for married couples filing jointly.
The Bill eliminates personal exemptions. Currently you're allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. The Bill eliminates this exemption.
State and local tax deductions
The Bill will preserve the state and local tax (“SALT”) deduction for anyone who itemizes, but limits the amount that may be deducted to $10,000. Currently the deduction is unlimited for your state and local property taxes plus income or sales taxes. The limit on the “SALT” deduction eliminates a popular itemized deduction and may force many taxpayers to now use the newly increased standard deduction ($12,000 single, and $24,000 married filing joint).
Child tax credit
The child tax credit is doubled to $2,000 for children under 17. The income threshold under which filers may claim the full credit increases to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today. The increase in the child credit and the income threshold to claim the credit may help offset the loss of the personal exemptions on your dependents.
The Bill lowers the cap on mortgage interest deduction on new mortgages on a first or second home to debt up to $750,000, down from $1 million today. However, homeowners who already have a mortgage are unaffected by the change.
The bill also disallows a deduction for the interest on home equity loans. Currently that's allowed on loans up to $100,000.
Alternative Minimum Tax
AMT has not been eliminated by the Bill. Instead the income exemption levels have increased to $70,300 for single, up from $54,300 currently; and to $109,400, up from $84,500, for married filing joint. The increase in exemption levels and the Cap on the SALT deduction, which is a large contributor in calculating the AMT, will mean fewer taxpayers will be in the AMT.
The estate tax exemption for individuals doubles to $11.2 million from $5.49 million currently. Annual gifting limits increase to $15,000 in 2018.
BUSINESSES AND CORPORATIONS
The corporate tax rate is decreased to 21% from the current rate of 35%. The Bill also repeals the alternative minimum tax on corporations.
The tax on pass-through businesses owners, partners and shareholders of S-corporations, LLC’s, LLP’s partnerships, and sole proprietors who pay their share of the business' taxes through their individual tax returns will be allowed a 20% deduction on qualified business income.
The 20% deduction would be prohibited for specific service industries, such as health, law and professional services, unless their taxable income is less than $315,000 if married filing joint, $157,500 if single.
However if the owner or partner in a pass-through also draws a salary from the business, that money will be subject to ordinary income tax rates. In order to prevent re-characterization of wage income to business profits to get the benefit of the pass-through deduction, the bill places limits on the amount of income that qualifies for the deduction.
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