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As we launch into the 2017 tax filing season we are receiving as many questions about the new Tax Cuts and Jobs Act and how it affects 2018 individual and business income taxes as we are about the best planning to file 2017 returns. To that end, here we are highlighting the 8 most significant ways tax reform may affect you in 2018. We will continue presenting additional information in the weeks ahead to help you best navigate your income tax planning.
Here are the eight tax change topics we receive the most questions about from both individual and business taxpayers:
- Individual income tax rates
- Personal exemptions
- Standard versus itemized deductions
- Child tax credits
- Mortgage interest
- Deducting state and local property taxes
- Estate tax
- Corporate income tax rate
Here is a short assessment of how tax reform has affected the eight tax topics compared to 2017 tax law. These are generalized overviews of the tax law changes, so please keep in mind how they may apply your individual and/or business tax strategy may be different.
Individual income tax rates: There were seven 2017 tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Though President Donald Trump had hoped for three tax brackets, the final 2018 tax reform law was passed with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Businesses have received the new employee income tax withholding tables and the IRS is working on updating its online calculator for businesses and employees to estimate their income tax liability and how these changes affect their annual tax bill.
Personal exemptions: The prior law allowed most taxpayers a $4,050 exemption for each household member. Under the 2018 tax law, personal exemptions are eliminated.
Standard deduction: The prior tax law allowed a standard deduction of up to $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing jointly, and $9,350 for heads of households. The new law increase the standard deduction to $12,000 for single taxpayers, $24,000 for married couples filing jointly, and $18,000 for heads of households.
Child tax credits: The 2017 tax law allowed a $1,000 tax credit for each qualifying child under age 17. Now that credit is increased to $2,000 per qualifying child, and up to $1,400 is refundable. A $500 credit has been added temporarily for other qualifying dependents.
Mortgage interest: The mortgage interest deduction formerly allowed homeowners to deduct interest on mortgages up to $1 million and home equity borrowing up to $100,000. Under the new law, the borrowing threshold is $750,000 for mortgage borrowing after December 14, 2017. Mortgages closed prior to that date still qualify for the $1 million limit. Beginning in 2026 the $1 million limit will return, while the home equity borrowing interest deduction has been eliminated until 2026.
State and local property taxes: Under the old law Taxpayers itemizing their deductions could deduct state and local real and personal property taxes, and either state and local income taxes or state and local sales taxes. Under the new law, state and local taxes remain deductible but the combination of all state and local taxes are now capped at $10,000.
Estate tax: Under the former rules, a 40% tax was levied on qualifying estates of more than $5.49 million per person, or nearly $11 million per married couple transferred upon their death. The 2018 law increases the overall estate tax exemption to nearly $11 million per taxpayer.
Corporate tax rate: Previously the tax rate charged on corporate income varied between 15% to 35% depending on the amount of annual taxable income for a flat rate of 35% on all corporate income beyond a certain income amount. The new tax law simplifies the rate by reducing the maximum corporate income tax rate on all corporate income to 21%.
Though many taxpayers were disappointed that the tax code was not more significantly simplified, the Tax Cut and Jobs Act is the most significant tax reform this country has experienced in more than 30 years.
While these tax changes do NOT affect your current 2017 tax return, they will affect your 2018 tax plan. Connecting with one of our experienced tax planning professionals will help you make the adjustments that may be needed in your overall tax strategy. Contact us to learn more about how to make certain you pay only what you owe, no matter how tax reform may affect your bottom line.
