On December 20, Congress passed the new tax plan, the most sweeping reform of our nation’s tax code in more than three decades. This legislation will impact the tax situation of almost every U.S. family, individual and business.
Following is a recap of the major provisions of the tax reform act as they apply to individuals and businesses.
On the Individual Side
The good news for individuals is that individual tax rates will drop between 0 and 4 percentage points, depending on the tax bracket. The new tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
More good news: The standard deduction will nearly double to $24,000 for married couples filing jointly, $18,000 for heads of household and $12,000 for singles and married couples filing separately. However, the personal exemption of $4,050 is being repealed.
It’s expected that significantly increasing the standard deduction will result in fewer people itemizing deductions when they file their tax return, since their total itemized deductions may no longer exceed the standard deduction. This would simplify tax filing for these individuals and families.
The child tax credit is also being increased from $1,000 to up to $2,000, with $1,400 of this refundable. And the phase-out for claiming the child tax credit is being raised from a starting point of $110,000 to $400,000 for married couples, and from a starting point of $75,000 to $200,000 for non-married households. This will result in more Americans being able to claim the child tax credit.
Note that these changes will become effective for tax years beginning after December 31, 2017. However, the changes are not permanent — they are only effective through the end of 2025.
A few more changes for individuals are:
- Elimination of the Affordable Care Act’s individual mandate requiring taxpayers to buy a qualifying health plan or pay a penalty, effective beginning after December 31, 2018.
- Reduction of the adjusted gross income (AGI) threshold for deducting medical expenses from 10% to 7.5% for 2017 and 2018.
- Increase of the alternative minimum tax (AMT) exemption to $109,400 for married couples filing jointly, $70,300 for singles and heads of household, and $54,700 for married couples filing separately. This expires in 2025.
- Doubling of the estate tax exemption from $5.6 million to an estimated $11.2 million per person in 2018. ($22.4 million for married couples). This increase in the exemption expires in 2025.
- Allowance of Section 529 plan distributions to pay for qualifying elementary and secondary school expenses. These distributions are limited to $10,000 annually for non-college expenses (public, private or religious elementary or secondary school).
To help offset the impact of these tax cuts on federal revenue, the tax reform act will eliminate or reduce some deductions that many Americans have claimed on their tax returns. These include deductions for personal casualty and theft losses, interest on home equity loans, moving expenses, and alimony for agreements signed after 2018.
Also, deductions for state and local taxes will be capped at $10,000, and the mortgage limit for deducting home mortgage interest will be reduced from $1 million to $750,000. All of these changes are effective only through the end of 2025.
On the Business Side
The centerpiece of the tax reform act on the business side is a permanent reduction of the top corporate income tax rate from 35%, which is one of the highest corporate tax rates in the developed world, to 21%. In fact, the entire graduated corporate tax rate schedule is being replaced with a 21% flat rate.
The tax reform act also includes a 20% qualified income deduction for owners of certain pass-through business entities like sole proprietorships, partnerships, LLCs and S corporations through 2025. Other beneficial business provisions in the act include the following:
- Doubling of bonus depreciation to 100% effective for assets acquired and placed in service between September 27, 2017, and January 1, 2023.
- Doubling of the Section 179 expensing limit to $1 million.
- A new tax credit for employer-paid family and medical leave through 2019.
- Repeal of the 20% corporate AMT.
To help offset the impact of these tax cuts on federal revenue, the tax reform act will eliminate or limit some deductions that many businesses have claimed on their tax returns. These include the Section 199 (or domestic production activities) deduction and deductions for net interest expense in excess of 30% of the business’s adjusted taxable income.
The tax act also limits deductions for net operating losses, places new limits on deductions for employee fringe benefits and excessive employee compensation, and limits like-kind exchanges to real property that is not held primarily for sale.
This is just a brief recap of some of the provisions of the new tax reform. Be sure to consult with a tax professional for more details on how the legislation could affect you, your family and your business.
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.
Gregory DePalma, CFP®
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