Summary of the Tax Cut and Jobs Act
Tuesday, December 4th, 2018 | Uncategorized | No Comments
President Trump signed the tax reform bill into law representing the most significant tax changes in more than 30 years. The new tax law primarily impacts 2018 and beyond. The corporate tax changes are permanent, while the individual changes will generally end in 2025.
Once President Trump signed the tax reform bill, the Internal Revenue Service began to interpret the intent of Congress and write the rules and procedures on how the new law will be implemented. This will likely take several years, so we may not know all the aspects until later in 2019 or 2020. Here is a summary of the changes.
2018 Tax Brackets
The bill retained the seven-bracket structure but with mostly lower tax rates. Under the previous law, the tax bracket rates ranged from 10% to – 39.6%. Under the new law, rates range from 10% to 37%. For example, under the old law, individuals filing as Married Filing Jointly, with income of $77,400 up to $156,150 would have been taxed at 25%., under the new law, income of $77,400 up to $165,000 will be taxed at 22%. Most individuals are expected to see some reduction in their tax rates. Under the old law, Married Filing Jointly taxpayers paid the maximum tax rate of 39.5% on income over $480,050.; under the new law, the top rate of 37% starts with income over $600,000. The rates have effectively been reduced by 1-3% for most taxpayers.
Standard Deduction and Personal Exemptions
The standard deduction has been almost doubled to $24,000 for married filing jointly taxpayers and the personal exemption has been eliminated. Under the old law, the standard deduction was scheduled to be $13,000. This change will likely result in fewer taxpayers itemizing their deductions. In addition to increasing the deduction to $24,000, many of the itemized deductions are also impacted.
State and Local Taxes
The deduction for state and local taxes is limited to $10,000 a year. This includes property taxes and state income taxes.
Home Mortgage Interest
The new law limits deductible the home mortgage deduction to interest on the first $750,000 of new acquisition debt, lowered from the previous limit of $1,000,000. No interest deduction is allowed for interest paid on home equity debt, unless one can prove the proceeds from the loan where used to purchase or substantially improve the home. This will require the taxpayer to show how the funds were used. The old law limits continue to apply to home acquisition mortgages entered into under the old -law rules.
Miscellaneous Itemized Deductions
The deduction for miscellaneous expenses subject to the 2% floor of adjusted gross income has been repealed. This includes deductions for unreimbursed employee business expenses (motel, mileage, meals, etc.), investment advisory fees, job hunting expenses, and safety deposit box rentals.The new law also repeals the reduction (phase-out) of itemized deductions for upper-income taxpayers.
Charitable Donations and Medical Expenses
Charitable deductions were retained, with some minor modifications and the floor for deducting medical expenses was restored to 7.5%.
Personal Exemption
The personal exemption has been eliminated. The personal exemption would have been $4,150 per exemption. So, a family of four, would generally have a deduction of $16,600. Taxpayers over 65 or blind would have gotten a slightly higher deduction.
So, if you do the math, the standard deduction increased from $13,000 to $24,000 (an increase of $11,000), while the personal exemption for a family of 4four is was eliminated (a $16,600 deduction). This would increase their taxable income by $5,600 (the $11,000 increase less the elimination of $16,600). So even with a slight decrease in the tax rates, this scenario could result resulted in a tax increase. These changes will benefit some taxpayers and harm others.The increase in the Child Tax Credits, should offset some of part of the taxes in this scenario.
Alternative Minimum Taxes
The new law increases the exemption amount and the threshold for phasing out the exemption so only a few of the upper-income taxpayers should be impacted by the Alternative Minimum Tax.
Moving Expenses
The deduction for moving expenses is repealed, except for active duty military personnel, and the tax exclusion for moving expense reimbursement is no longer available.
Alimony Deductions
The new law repeals the alimony deduction for payors and the corresponding taxable income for the recipients for divorce or separation agreements entered into or modified on January 1, 2019, and thereafter.
Estate Taxes
The maximum federal estate tax exemption doubled from the current rate to $11,200,000. With “portability,” a married couple can effectively shelter up to $22,400,000 of assets from estate tax.
Medical Health Insurance Mandate
The individual insurance mandate required under the Affordable Care Act (Obamacare) is abolished as of January 1, 2019.
Long-Term Capital Gains
The new law retains the existing 0%, 15%, and 20% tax rates on long-term capital gains and dividends. These tax rates are almost the same as what they would have been under the old law, with the only change being in the way the inflation adjustment for 2018 is calculated.
Kiddie Tax Changes
Under the new law, children who are subject to the Kiddie Tax, will see their income taxed at the same rate to as estates and trusts. Under the old law, their income could be taxed at their parent’s tax rate. This will likely result in substantial tax increases over prior years.
Getting Ready to File Your Taxes
Electronically filing a tax return is the most accurate way to prepare and file. Errors delay refunds, and the easiest way to avoid them is to e-file.
The IRS urges all taxpayers to file a complete and accurate tax return by making sure they have all the needed documents before they file their return. Be sure and gather all your tax documents, including Year-end Forms, W-2 from employers, Forms 1099 from banks and other payers, and Forms 1095-A from the Marketplace for those claiming the premium tax credit.
Taxpayers should confirm that each employer, bank, or other payer has a current mailing address or email address. Typically, these forms start arriving by mail – or are available online – in January. Check them over carefully, and if any of the information shown is inaccurate, the taxpayer should contact the payer right away for a correction.
The tax professionals at WarrenJackson CPA’s are ready to assist you with your tax planning and tax filing needs. Contact one of our tax professionals for assistance.
WarrenJackson CPAs
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