No, I haven’t read the 505 page bill and 1097 page total with explanations yet, but it appears the Republicans have the votes to pass a final version of the new tax law, and assuming it gets passed in its current form (as of this writing 12-17-17) and is to the President’s Desk by Christmas, the US will have a new tax law for the new year.
What impact this will have on each person depends on a lot of factors, but let’s review some key parts of the law as a starting point.
The Tax Cuts and Jobs Act features the largest single reduction in the corporate tax rate in US history, from 35% down to 21%, a feature benefit President Trump wanted to spur companies to stay in America, and create jobs in America. The bill also lowers taxes for most Americans who pay tax.
Individual Income Tax:
- The top tax rate falls to 37% while the income dollars that start the top tax bracket rise slightly.
- Capital gains tax is essentially the same except for the bracket adjustments.
- Charitable deductions remain mostly the same, with an upward adjustment for cash gifts to charity to a new limit of 60% of Adjusted Gross Income (AGI).
- If you live in a high tax state (think California, Connecticut, New Jersey, New York, etc.) there is a new $10,000 cap on the Federal deduction you can take for Local, State, and Property tax. And you can’t pre-pay your 2018 tax in 2017 to take advantage, they blocked that move.
- The standard deduction doubles and the personal exemption goes away, effectively combining the two and increasing the resulting sum.
- The number of Americans that pay no income tax is also projected to increase from about 44% to 47.5%. The other 52.5% pay 100% of the income tax bill. Cynics say it is a tax break for the rich, but to be fair, when only about half the people pay income tax, it is hard to cut income tax for people who don’t pay income tax.
- Even families that don’t pay tax get a break if they qualify for Child Tax Credit which increases to a benefit of $1000 to $2000. Even if a family does not owe income tax, that credit would be paid out to them up to about $1400.
- Also, the Individual Mandate has been eliminated. This was the federal provision that everyone must buy health insurance which is part of how the Affordable Care Act (a.k.a. ObamaCare) paid for itself and was deemed a tax by the Supreme Court. That tax has been removed.
- The Alternative Minimum Tax (AMT) remains, but fewer people will pay it. The threshold is increased substantially to $500,000 per individual or $1,000,000 per married couple from the $120,700 and $160,900, respectively, that it was in 2017.
- Mortgage interest can still be deducted, but at a lower threshold through 2025. Existing mortgages are grandfathered, but new initial purchase mortgage interest will be deductible to a limit of a $750,000 mortgage, and the interest deductibility of a home equity line is eliminated.
- Itemized deductions over 2% of AGI are eliminated (things like the home office deduction and investment and tax preparation expenses), and the medical expense over 10% of AGI is reduced to over 7.5% of AGI.
- Retirement plan contribution limits remain unchanged, other than the continued indexing.
- The income tax cuts are temporary for individuals, as they sunset after 8 years in 2026.
Estate & Gift Tax:
- The gift and estate exemptions doubled, allowing each person to pass, in 2018, $11,200,000 tax-free, and that means $22,400,000 per couple, with proper planning. These amounts continue to be indexed, and portability remains in place.
- The estate tax does not get repealed in this bill as it did in the House version, just substantially fewer people will pay the tax (and it was just over a thousand people a year at the prior number).
- Generation Skipping is not addressed, yet the GST exemption is equal to the Basic Exclusion Amount and thus also $11,200,000 for 2018.
- The top Corporate tax rate drops to 21%.
- Income from “pass-through” businesses like Sole Proprietorships, Partnerships, Limited Liability Companies, and S-Corporations will get to deduct 20% of their income tax-free, although for some service businesses like investment firms, doctors, and lawyers that deduction only applies up to about $315,000 for a married couple.
- The corporate AMT is eliminated. CEOs claimed the AMT ignored many of their deductions for investments in plants, equipment, and research, some of the very things the tax bill is trying to incent.
Some of the controversial items left out in earlier versions ended up untouched including the deduction for student loan interest, the deduction for substantial medical expenses, graduate student tuition waivers, and teacher out-of-pocket expenses.
So in the end, what we know is things are changing, and in some cases substantially. Income taxes should be a lower burden for most, and the estate tax is applicable to only a few. Business owners, likewise, will almost all have a smaller tax bill. The greatest differentials will occur based on the taxpayer’s state of residence and their various deductions. Modeling one’s individual and company income tax situation will be crucial to understanding the individualized impact and strategies.
- Follow Congress.gov - Bill H.R.1.
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