How the New Tax Bill Affects You

The new tax bill was signed by President Donald Trump on Friday, December 22, 2017. The tax bill will take affect starting in the 2018 tax year. The final bill is over 500 pages, and while the summary below is not fully exhaustive, below is some highlights of the major changes. It is recommended you speak with a tax expert on how the tax bill will ultimately affect you.

Tax Brackets: The bill keeps the seven income tax brackets, but lowers several tax rates and has a top rate of 37 percent. The income levels will rise each year with inflation, which will be based on the chained consumer price index.

Standard Deduction: The old tax bill’s standard deduction is $6,350 for single filers and $12,700 for married/joint filers. The new tax bill doubles the standard deduction to $12,000 for single filers and $24,000 for married/joint filers.

Child Credit: The child tax credit is increased from $1,000 to $2,000 for each child. Even for parents who do not have enough to pay any tax liability can claim the credit up to $1,400.

Mortgage Interest, and State and Local Tax Deductions: Given the higher standard deductions, the changes to the mortgage interest, and state and local tax deductions are not as favorable as they used to be. The old tax bill allowed you to generally deduct the amount you pay for state and local income taxes, including property taxes. You could also deduct the interest on your mortgage loan up to $1,000,000. Now the new tax bill has a cap of $10,000 total for state, local, and property tax deductions.  You can also only deduct the interest on your mortgage loan up to $750,000.

Medical Expenses: Under the old tax bill, you could deduct out-of-pocket medical expenses that exceed 10 percent of your adjusted gross income. Now the new tax bill allows you to deduct out-of-pocket medical expenses that exceed 7.5 percent of adjusted gross income in 2018. However, in 2019, this will go back to the 10 percent threshold.

Individual Mandate: The new tax bill repeals the tax penalty on those without health insurance. Under the Affordable Care Act, individuals must buy a qualifying health insurance plan or pay a penalty. Now that the penalty is eliminated, the argument is fewer individual may sign up for coverage, which could lead to higher premiums, which is an argument made by people who are supportive of the Affordable Care Act.

529 Plans: Under the new tax bill, you are now able to withdraw up to $10,000 each year, per child, to pay for private or religious schools and receive the same tax benefits as before.

Investment Fees and Unreimbursed Business Expenses: You will no longer be allowed to deduct fees you pay to an investment adviser and similar expenses related to money management. This was previously an allowable deduction if they added up to at least 2 percent of your income.

Estate Taxes: This will likely not affect a large portion of the population or the readers here, but the exemption amount for paying any estate taxes increased from $5,490,000 to $10,000,000. Anything above the $10,000,000, the amount will be taxed at 40 percent.

Business Taxes: While this may not affect your personal taxes directly, the changes to the business taxes could have a very large affect on you through the economy, your employment, and/or any business you may own.  The new tax bill lowers the highest corporate tax rate from 35 percent to 21 percent. The new tax bill changes the pass-through businesses (Partnership, S-Corporation, Sole Proprietorship) taxes by allowing individuals to deduct up to 20 percent of their qualified business income from these pass-through businesses. These deductions begin to phase out for individual filers making $157,500 and married/joint filers making $315,000. Also, corporations are now limited to deduct interest expense to 30 percent of income, which could make it more expensive for financial firms to borrow.

Other

• Taxpayers can still deduct the losses of their house due to fire, flood, burglary, or similar event, but only if the loss occurred during an event that the president officially declares to be a disaster.
• Alimony is no longer a deductible expense, and the person receiving the payments would no longer need to pay tax on the income received.
• Moving expenses are no longer to be a deductible expense, but there are some exceptions for members of the military.
• Tax preparation or similar tax-related expenses are no longer deductible.

Major items that are not changing

• Student loan interest deduction remains intact as you are allowed to deduct up to $2,500 in student loan interest each year.
• Employer-paid tuition is not taxable as long as it meets certain conditions and amounts to no more than $5,250 a year.
• Employees of educational institutions who receive reduced tuition for themselves, spouses or dependents are generally not taxed on that income.
• You can still exclude up to $250,000 for an individual filer or $500,000 for married/joint filer, in capital gains on the sale of a home as long as you use it as a primary residence for 2 of the last 5 years.
• Tax credits for electric vehicles and wind farms up to $7,500.
• Teachers can take a $250 deduction for money they spend on certain job-related and classroom expenses.
• 401k tax breaks remain the same.

As a reminder, none of the changes described impact your 2017 taxes, but will impact your 2018 taxes and on. While there is a lot of debate out there on who this will benefit the most and what kind of long-term impact this will have on the economy and budget deficit, it is important to research the changes to see how this will impact you and your business. I would highly recommend reaching out to a tax professional to discuss the changes and see how they will impact your 2018 taxes and on.