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Tax Reform: How Will It Affect You?

In late December 2017, Congress passed what is commonly referred to as the Tax Cuts and Jobs Act. The legislation makes significant changes to many areas of the tax law, adding new provisions as well as revising, and even taking away, some long-standing rules. Here’s a rundown of some key aspects of the law.

New Tax Brackets for Individuals and Corporations

Beginning in 2018, the tax brackets have been changed to 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate is down from 39.6% and rates are generally lower at various income levels. Once withholding tables are adjusted, workers could begin to see changes in their paychecks as early as late January or early February. The new rate structure is set to expire at the end of 2025.

For businesses, the corporate tax rate is now 21%, down from a top rate of 35% previously. Unlike the individual tax rate changes, this rate reduction was made permanent. The corporate AMT is eliminated.

Provisions that Will Affect Individuals’ Tax Returns

  • The standard deduction will jump to $12,000 for single individuals and $24,000 for married couples. At the same time, the law eliminated the existing $4,050 personal exemption for every taxpayer and their dependents. For many people, that may mean they will no longer choose to itemize, since the new standard deduction may be higher than their total deductions. For larger families or single parents, the changes could reduce their chances to lower their taxable income. However, that problem could be offset by a doubling of the maximum child tax credit to $2,000. The phase-out for the child tax credit is also higher, beginning after income levels of $400,000 for married filing joint and $200,000 for all other taxpayers, so it is accessible to more taxpayers.
  • For those who do itemize, there is no longer a limit on itemized deductions (this provision ends in 2025).
  • A $10,000 cap on the total deduction for state and local taxes and property taxes. This could have a significant impact on taxpayers in high tax states and cities. Tax planning in this area may also be affected by whether the taxpayer is subject to the individual alternative minimum tax (AMT), which remains in effect under the new law.
  • The size of the mortgage for which you can deduct interest has also changed. Interest on new mortgages is deductible up to $750,000 in debt. The maximum amount of debt was previously $1 million. This does not affect mortgages in place before December 31, 2017, but should be considered in home financings going forward, since less of the interest will be deductible. It is also no longer possible to deduct home equity loan interest (up to $100,000 was previously deductible).
  • The income levels at which you’re subject to the AMT have been increased, which should mean it will affect fewer taxpayers. This change will end after 2025.
  • Starting in 2019, there will be no penalty for individuals who do not have health care insurance.
  • The estate tax exemption roughly doubles from $5 million to $10 million. Indexed for inflation in 2018, the exemption can be expected to be $11.2 million for individuals and $22.4 million for married couples. Above that level, estates are taxed at a 40% rate. The exemption also applies to the gift and generation-skipping transfer taxes, so families have an opportunity to transfer a great deal of wealth in the years before the exemptions are set to return to much lower levels in 2025.
  • Expansion of Section 529 plans. Up to $10,000 annually of the funds in these tax-advantaged savings accounts can now be used for K through 12 private school tuition. Their tax benefits were previously only available to those saving for college.
  • The alimony deduction is eliminated for divorces and separation agreements that go into effect after December 31, 2018.
  • Moving expenses, whether personal or reimbursed by an employer, can’t be deducted except by a member of the military. You also will no longer be able to deduct unreimbursed business expenses or casualty and theft losses that occur outside of a declared presidential disaster area.  

New Rules for Businesses

  • A maximum 20% deduction for “qualified business income” of pass-through entities. This rule, which is subject to various limitations, is available to sole proprietors, partnerships, LLCs and other non-corporate businesses. It begins to phase-out at $157,500 for most service providers ($315,000 phase-out for married taxpayers).
  • An increase in the section 179 expensing to $1 million from $500,000, with a phase-out beginning at $2.5 million.
  • Limits on net operating loss deductions. The deduction for losses, which was unlimited, is now limited to 80% of taxable income. Carrybacks are essentially eliminated (except for in certain losses in the trade or business of farming). NOLs can be carried forward indefinitely.

Considerations for 2017 Taxes

  • While most of the law takes effect beginning in 2018 or later, there are some retroactive provisions. For example, the legislation made it possible to deduct medical expenses that exceed 7.5% of your income, which was down from 10% under existing law for two years, beginning in 2017. As a result, you may be able to deduct more expenses in your 2017 tax return this year or qualify for the deduction for the first time.

This far-reaching legislation will have immediate effects on many individuals and businesses. Contact your CPA for more details and visit the AICPA’s 360 Degrees of Financial Literacy site and Tax Reform Resource Center