On December 19, 2017, Congress voted to pass into law the 2017 tax reform bill, and three days later on the 22nd, President Trump signed it into law. It unites the two previous tax reform bills that passed through the House of Representatives and the Senate in November and December respectively, with a few small changes during reconciliation in conference.
This bill, officially known as the Tax Cuts and Jobs Act of 2017, marks the biggest overhaul of the U.S. tax code in over 30 years. Now that it has become law, it is essential for you to know the key factors of the bill and how it might affect you.
The final bill retains seven tax brackets organized by income. The tax rates for each tax bracket has changed, with the new rates from lowest tax bracket to highest tax bracket at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. The current tax rate in the same order is 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 33 – 35 percent, and 39.6 percent.
Here is a breakdown of the new tax brackets for individuals and taxpayers filing as married filing jointly respectively:
- Up to $9,525 or $19,050: 10%
- $9,526 to $38,700 or $19,051 to $77,500: 12%
- $38,701 to $82,500 or $77,401 to $165,000: 22%
- $82,501 to $157,500 or $165,001 to $315,000: 24%
- $157,501 to $200,000 or $315,001 to $400,000: 32%
- $200,001 to $500,000 or $400,001 to $600,000: 35%
- Over $500,000 or over $600,000: 37%
These changes will begin in 2018 and go through 2025. This means your updated tax withholdings based on your new tax rate technically begins January 1. However, you probably won’t see any actual changes to your paycheck until February 2018.
Deductions and Credits
The new bill contains several key changes related to deductions and credits. The standard deduction has doubled from $6,350 to $12,000 for single filers, and the increase for joint-filing couples is $12,700 to $24,000. This means that fewer taxpayers will itemize their taxes, since you would need to have a significant number of individual deductions to reach a level above the standard deduction.
If you live in an area that pays state and local taxes, you will find that you might not be able to deduct as many of those taxes as you have in the past. Although the reconciled bill did not do away with them, which one version of the tax reform bill did, there is a $10,000 cap. The mortgage deduction has also lowered, with a cap of $750,000 on mortgage debt for any new home buyers. The previous amount was $1 million.
Another big change is that there is no longer a personal exemption. In the past, you had a $4,050 exemption for yourself, your spouse, and each dependent. This would greatly reduce your taxable income. Now, you do not get to have this money deducted from your taxes. However, the child tax credit has doubled to $2,000 for children under 17, which can be claimed by any single parents making up to $200,000 and married couples making up to $400,000.
One possible benefit on the new tax reform bill is that those who have to take care of non-child dependents, such as their elderly parents, can now claim a $500 credit. This can also be applied to adult children with a disability or other adults that you might have to support. However, this credit is temporary, so the benefit might not last long.
Deductions that remain include:
- Student loan interest up to $2,500 a year
- Medical expenses that add up to more than 7.5 percent of adjusted gross income, which is a lower threshold than the previous 10 percent
- Classroom supplies for teachers, up to $250
- Electric car tax credit for up to $7,500
- Charitable donations
- Retirement savings
- Tax break for selling your primary home at a profit up to $500,000 or $250,000 for single filers
- Tuition waivers for grad students are tax-free
Deductions, reimbursements, and credits ending include:
- Moving expenses, except for those in the military
- Alimony payments
- Tax preparation deduction
- Disaster deduction, unless it is officially declared a national disaster
- Bicycle commuting reimbursement
- Estate tax, unless your estate is worth more than $11.2 million for single filers and $22.4 million for joint filers
- Alternative Minimum Tax, with an exemption increase from $54,300 to $70,300 for single filers and $84,500 to $109,400 for joint filers, which phase out at $500,000 and $1 million for single and joint filers respectively
Other Key Changes
There are a few other key changes included in the tax reform bill that impacts individual taxpayers. For one, the individual mandate for health insurance was removed. This means that you no longer face a tax penalty if you do not have adequate health coverage, which was an important but controversial part of the Affordable Care Act. You can also use your 529 savings plans to pay for tuition at private and religious K-12 schools or apply them to expenses for home-schooling your children. Additionally, there are some changes to how inflation is handled.
Changes for Businesses
Many of the changes in the tax reform bill impact businesses, especially corporations. The maximum corporate tax rate drops to 21 percent from 35 percent, which marks the lowest corporate tax rate since 1939. Pass-through businesses see an increased standard deduction to 20 percent, which is limited after the income reaches $157,500 for single-filers and $315,000 for joint filers. These include sole proprietorships, LLCs, partnerships, and S-corporations. This deduction ends after 2025. Additionally, private equity funds, hedge funds, and real estate companies will also have the same rate.
Corporations also will see their ability to deduct any interest expense to 30 percent of their income. Businesses can deduct the cost of any assets depreciating in one year rather than amortizing them, although it does not apply to structures. There are stiffer requirements for carried interest profits and the alternative minimum tax is eliminated for corporations. The tax system also changes to a territorial rather than a worldwide system, which means they are no longer taxed on profits made overseas.
How It Impacts You
The impact of this tax reform on you depends on your filing status, your income level, your family size, and what type of deductions or credits you normally utilize on your federal income tax return. If you are a single-filer and did not have many deductions in the past, you might not notice a difference thanks to the larger standard deduction. You might even find that you have a larger refund. However, families with children might find that their tax relief is greatly reduced because they no longer have this exemption. According to non-partisan, third-party sources, corporations and high-income families and individuals are set to benefit the most from the new tax reform.
Most people will see minimal savings in the next few years, but even this might go away over time, especially with inflation. Many of the benefits for lower-income families might be negated by other changes, such as the elimination of the personal exemption. It also most likely will increase the national debt by almost half a trillion dollars over the next decade, although there will be an estimated $1.5 trillion in lost revenue from taxes. The difference would be made up through a $600 billion in dynamic revenue reflow through an increase in the GDP, an increase in wages, and an increase in job creation.
Some of the biggest changes relate to itemizing your tax deductions, especially to include charitable donations. Starting with your 2018 tax returns, you probably will find that it makes more sense to take the larger standard deduction. Therefore, you might want to go ahead and give your 2018 charitable donations a bit early so you can include them on your 2017 tax return. The same goes for paying your property taxes since there will now be a limit of $10,000 on state and local taxes, which includes your property taxes. If you tend to spend above that number, you might find paying your property taxes might help you out with your 2017 tax return. The same goes for any home equity loans or mortgages taken out for buying a new home or remodeling your current home.
You have a whole year before you have to worry too much about these changes. Although they will apply for the 2018 tax year, you will not file your return until April 2019. When you go to file your return in April 2018 for the 2017 tax year, you will still work off the current tax code. Although you have time, it is always beneficial to discuss your own unique situation with a tax professional to better understand the impact on you.
As stated, the new tax code does not change anything for any previous tax years, so if you have any back taxes due, you will not see any of the potential benefits from the new bill apply. It might be beneficial to go ahead and handle any back taxes and unfiled returns now before you start to get used to the new tax code. If you need help dealing with your large tax debt or filing your back taxes, contact Fidelity Tax Relief. We specialize in assisting taxpayers to negotiate a tax settlement with the IRS and finally break free from their debt. Call us today at 877-372-2520 to talk to one of our tax professionals about your situation.