Tell Me About The Tax Bill

According to a Forbes article, the Tax Cuts and Jobs Act of 2017 will cost the United States government $1.5 trillion in lost revenue. I want to talk about the most important things you need to know about this law. I am neither an accountant nor a tax attorney, so please take this article as generalized information and not as tax advice. You will want to refer to your tax professional to see how the law will specifically impact you.

The law goes into effect for tax year 2018 for the most part, with some changes starting in 2019. As a result, when we all do our taxes next April of 2019, the changes I am outlining here will be applicable. Each family will be impacted differently based on size of family, amount and type of income, and other individual circumstances. It is important to note that no two tax filers are exactly alike, so the new law’s impact on each person will differ.

The most important change for most of us is the tax bracket modifications. There are still seven tax brackets that vary according to income, but for the most part, tax rates have been reduced. For example, the top tax rate was reduced from 39 percent to 37 percent and the middle brackets have been reduced from as low as 1 percent to as high as 4 percent.

The following graph shows each tax bracket and the corresponding income levels. You will notice that the income levels have changed as well in many of the tax brackets. The changes have, for the most part, lowered the income required to be in each level. For example, a married couple filing jointly and making $160,000 per year was in the 28 percent tax bracket last year but is now in the 24 percent tax bracket. A couple making $240,000 per year was in the 33 percent bracket last year but is now in the 24 percent bracket. That is a big decrease for a couple making that kind of money.

The tax bill nearly doubled the standard major change in deduction amounts. In 2017, the standard deduction for an individual was $6,350 and $12,700 for couples filing jointly. Moving forward, those amounts are $12,000 individually and $24,000 joint. While the law nearly doubled the standard deduction, it eliminated the personal exemption. This change will impact most tax filers as the previous personal deduction was $4,050 per person and dependent.

Several reports noted that the mortgage deduction was going to be eliminated with the bill, but the final draft did include mortgage deductions. Current mortgage holders are able to deduct interest up to $1 million, but new mortgages will limit deducting new debt at $750,000. Interestingly, the deduction for home equity debt was eliminated. This is a big deal to many consumers with home equity lines of credit.

The child tax credit was also eagerly anticipated. The child credit was doubled from $1,000 to $2,000 per child under the age of 17. The income thresholds have increased as well, so more individuals will be able to take advantage of this credit. The bill also allows a $500 credit for those with dependents over age 17 who are still receiving support from you. This is the “my college grad still lives in my house” credit!

Let’s discuss estate and corporate taxes. The bill certainly had features geared toward working America, but it also has features meant to benefit the wealthy. The estate tax exemption has doubled. In 2017, the federal estate tax exemption amounts were $5.49 million per individual and $10.98 million per married couple. Now the exemption amounts are $11.2 million individually and $22.4 million per married couple. As far as corporate taxes are concerned, the most important change reduced the tax itself from a range of 15 percent to 39 percent to a flat rate of 21 percent. If you were in the high corporate tax rate of 39 percent, you are thrilled with this change.

While we saw major changes to things like mortgage deductions and corporate tax rates, we did not see changes in the capital gains rate of 15 percent, charitable contribution or the student loan interest deductions. The penalty for individuals who choose not to purchase health insurance was eliminated. The penalty was set to begin in 2019. That will no longer be enforced.

If you have specific questions on how this bill will impact you, I suggest meeting with your tax adviser.