On December 22, 2017, President Trump signed the new tax reform bill, the Tax Cuts and Jobs Act, into law. This new tax law brought big changes for both individuals and companies. In general, the changes to individual provisions expire at the end of 2025, but the corporate changes are permanent. While new the new law includes many tax cuts for corporations and business owners, it also restores and expands some tax benefits for individuals. The final bill includes trillions of dollars in tax cuts, most of which (but not all) are offset by measures that will raise revenues.
It is important to note that this law does not affect 2017 taxes for which Americans are currently filing returns. As always, Crippen & Co. is here to help answer any questions you may have. Here are some of the most important changes to become acquainted with as you plan for 2018.
Taxes for Individuals
Bracket changes were some of the most impactful changes to individuals. Tax brackets have changed and are generally lower than before:
+ 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
+ 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
+ 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
+ 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
+ 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
+ 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
+ 37% (over $500,000; over $600,000 for couples)
The standard deduction has nearly doubled, to $12,000 for singles and $24,000 for couples. While the law doubles standard deduction amounts, personal and dependent exemption deductions are now eliminated. Fewer people will find it advantageous to itemize. Those who continue to itemize, however, will see significant changes — especially if they’re homeowners:
- All state and local tax deductions are limited to $10,000.
- The home mortgage interest deduction is limited to payments on $750,000 of debt. If you bought a property before Dec. 15, 2017, you’re in luck, the current $1 million level is grandfathered in. Home equity loan interest is no longer deductible for anyone.
- The new law maintains the itemized deduction for medical expenses, and temporarily reduces the limitation from 10% to 7.5% of adjusted gross income for tax years 2017 and 2018 for everyone. Beginning in 2019, only medical expenses that are greater than 10% of the adjusted gross income will be deductible.
- Deductions for major charitable donations are preserved under the new law, with the exception of a few specific deductions. A deduction for payments made in exchange for college athletic event seats, for example, no longer applies.
Another change is to the Alternative Minimum Tax (AMT). The AMT still exists, but the exemption is increased, meaning fewer taxpayers will be paying AMT. The thresholds for these items raised income exemption levels to $70,300 for singles, up from $54,300; and to $109,400, up from $84,500, for married couples. This change should benefit those in middle or high-income households that were previously affected by the AMT.
The child tax credit is doubled to $2,000, with a refundable portion up to $1,400. You can now also receive a $500 credit for each non-child dependent whom you’re supporting, including a child 17 or older, an ailing elderly parent, or an adult child with a disability. This credit begins to phase out at an income level of $400,000 for married/joint filers and $200,000 for single filers. This change should benefit low- and middle-income households with children.
The estate tax is still with us, but the exemption has been doubled. The number of families that will be subject to federal estate tax is now much smaller than before.
Taxes for Businesses
The big story here is the lowering of the Corporate tax rate from a maximum of 35% to 21%. However, there are other important provisions as well:
- The corporate AMT is eliminated.
- The limit on Section 179 expensing is increased to $1 million.
- The new law limits the deduction for net operating losses to 80% of taxable income.
- Instead of being an immediate deduction, research and development expenditures will need to be written off gradually. (This provision doesn’t kick in immediately, however.)
- “Passthrough” entities get a deduction of 20% of qualified business income, but there is an income phase out. The 20% deduction would be prohibited for anyone in a service business (except engineers and architects) — unless their taxable income is less than $315,000 if married ($157,500 if single).
Businesses and individuals will need to carefully consider what their situation is in 2018 and plan accordingly. Knowing where you stand before tax time comes around is crucial. Make sure you talk to your Crippen & Co. accountant today to be prepared for these new tax changes.