22 Dec 2017 The Tax Bill Is Now Law
I have to say in all honesty, that today’s Brief has left me feeling too much like Ebenezer Scrooge on the last business day before Christmas, but as he would say – ‘its business.’ We have been getting a lot of questions from clients regarding how the new tax law will impact them. Today we provide some of the broad tax changes that are now law.
Depending upon who’s making the claims, it is estimated that some 75% to 87% of taxpayers will see reductions in their taxes for 2018. But how much you make, how you earn your money, whether you give a lot of it, borrow significantly, live in a high-tax state, and so many others have significant impact on the answer to whether you will pay more or less next year.
There are seven brackets in the new tax bill and the five higher than the 10% and 15% change with varying degrees of impact. At the top, the highest-earning taxpayers will see their current 39.6% fall to 37%, but that does not necessarily mean their tax bill will be lower. Many of their former deductions will be gone and the phantom of the Alternative Minimum tax still looms for some 200,000 taxpayers, according to the Tax Policy Center.
Here’s a comparison of the current and proposed tax brackets as presented by the Wall Street Journal using the latest IRS and Conference Committee data:
Overview of the New Tax Bill
The following material is taken from the Wall Street Journal, Thomas, Judy & Tucker, and the actual bill.
The Standard Deduction
The tax bill nearly doubles the “standard” deduction for those who do not itemize deductions to $12,000 for single filers and $24,000 for married couples filing jointly. The personal exemption is eliminated.
A major goal of the new tax law was to reduce the tax burden on small businesses that generate some 70% of new jobs in this country. They did it for some, but left a lot out. Sole proprietors, S corporations and partnerships, such as LLCs paid taxes on the income from these businesses at their owner’s individual rate, which was a high as 39.6%. Qualified businesses can now deduct 20% of certain business income. Companies that do qualify include services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. There is an income phase-in of $315K (or $157K for single) for both the wage limit and the specified service trade or business exclusion.
The bill caps the deduction for state and local taxes at $10,000, which includes property tax, plus income or sales taxes.
The bill allows deduction of mortgage interest on loans up to $750,000, but existing larger loans would be grandfathered. Current law allows for deductions on loans up to $1 million.
The tax bill lowers the threshold above which medical expenses are deductible, from 10% of income to 7.5% of income, for 2017 and 2018 returns. Starting in 2019, the level goes back up to 10% of income.
The bill makes no changes to deductions for interest paid on student loans.
The bill makes no major changes to deductions for charitable giving.
Alimony payments will no longer be deductible for the payer for agreements signed after 2018.
The tax bill doubles the child-tax credit to $2,000 and raises the income level at which the credit starts phasing out to $400,000 for married couples and $200,000 for others.
Alternative Minimum Tax
The alternative minimum tax on individuals, a parallel tax that disallows personal exemptions and state deductions for high-earning households, is narrowed. The Tax Policy Center estimates that some 200,000 households will continue to pay the ATM, compared to 5.2 million currently.
Estates over $11.2 million per individual are taxed at 40% in the plan, up from $5.6 million.
We will keep you informed as we learn more. We hope you and yours have a wonderful holiday season.