Over the past few weeks there has been substantial speculation about tax reform. Now that the Tax Cuts and Jobs Act has been signed into law, let’s discuss the final bill. Hopefully this will clarify some of the lingering questions.
The Tax Cuts and Jobs Act is certainly the largest tax reform since 1986. Many individuals will want to prepare for the changes ahead. While there is no single best option, the prevailing opinion, with which we concur, is that it is generally a good idea to accelerate any deductions into 2017, and to defer income to 2018. This could mean paying all state and local taxes before the end of the year, or moving charitable donations planned for 2018 into 2017. These changes would allow individuals to take advantage of all the deductions available this year, while shifting their income to a lower tax rate for next year.
Individuals
Tax Rates
The Tax Cuts and Jobs Act has lowered individual tax rates across the board. There will still be seven tax brackets, but the new tax rates will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The previous tax rates for individuals have been 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. These new tax rates will be effective starting 2018, but will expire after 2025. Much of the changes regarding individuals in the final tax reform bill are temporary. In the future Congress could choose to extend these changes, but to maintain budget requirements, the changes must be designed to expire.
Simplified Deductions
The Tax Cuts and Jobs Act takes aim at many deductions in an attempt to simplify the tax code. The standard deduction has been increased to $24,000 for married couples filing jointly and $12,000 for single filers. As a result, taxpayers who have historically itemized deductions on Schedule A may not have the opportunity to do so in 2018.
The State and Local Tax deduction remains, but is now capped at $10,000. The mortgage interest deduction also remains, but new home owners will only be able to deduct the first $750,000 of their mortgage debt.
The deduction for Charitable Contributions has been retained under the new reform.
Note that popular deductions such as the deduction for student loan interest and the deduction for teacher’s classroom supplies remain in place.
Family Incentives
The personal exemption has been repealed under the Tax Cuts and Jobs Act. Individuals no longer can claim a $4,050 personal exemption for themselves or any of their dependents. The law does increase the child tax credit to $2,000 for children under 17, and also creates a new lesser tax credit for non-child dependents.
The new Act has expanded the use of the popular 529 Plans to include private education for grades K through 12.
Alternative Minimum Tax
The alternative minimum tax has often been discussed with the new tax reform bill. In the final version of the Tax Cuts and Jobs Act the individual alternative minimum tax was not repealed. However, fewer tax payers will need to worry about the alternative minimum tax as the exemption amounts have been raised.
Businesses
Corporate Taxes
The corporate tax rate drops significantly from 35% to 21% beginning in 2018. Additionally, the alternative minimum tax was repealed for corporations. Unlike the changes for individuals, these new changes will be permanent.
Pass-Through Entities
Sole proprietors, partnerships, limited liability companies, and S corporations that are not taxed as corporations are also receiving a tax break. Pass-through entities will be given a maximum 20% deduction on qualifying business income. However, it is important to note that there are provisions in the Tax Cuts and Jobs Act that prevent pass-through owners, mainly service providers such as lawyers, accountants, and doctors, from converting their compensation income into profits to take advantage of this lower tax rate.
Each situation is different, and the new tax reform will affect everyone differently. We are continuing to comb through the Tax Cuts and Jobs Act so that we can best serve our clients. If you have any questions or are interested in personalized solutions feel free to contact us and we would be glad to discuss your individual situation further.
