The new tax reform bill overhauls the Internal Revenue Code and provides broad tax relief to workers, families and businesses of all sizes. Tax rates are lowered for individual taxpayers and businesses, taxed deductions and credits are increased, and various tax deductions and credits are eliminated or reduced. A typical family of four earning $73,000 a year could receive a tax reduction of as much as $2,000. Congress has passed legislation, and the President is expected to sign the bill into law. Most of the provisions contained in the tax reform bill apply to tax year 2018 (the taxes filed in 2019) and future years up to December 31, 2025.
Tax professionals may consider looking at their clients’ individual tax situations and crunch the numbers to determine if income tax withholdings and estimates need to be revised for 2018. Please review more detailed explanations of the rules and exceptions to the tax reform bill.
Here is a breakdown of some of the major provisions in the new tax bill and how they may impact your clients:
- Income Tax Rates: Individual tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- Standard deduction: Single taxpayers will see their standard deduction jump from $6,350 for 2017 taxes to $12,000 for 2018 taxes, while married couples filing jointly will see an increase from $12,700 to $24,000.
- Kiddie Tax: Provision is modified whereby the taxable income of a child that is attributable to earned income is taxed at single rates and unearned income is taxed at trust and estate rates.
- Personal and dependent exemptions: These are eliminated in the new bill.
- State and local taxes/home mortgages: The bill limits the amount of state and local property, income, and sales taxes that can be deducted to $10,000. It also caps the amount of mortgage indebtedness on new home purchases on which interest can be deducted at $750,000, down from $1,000,000 in current law.
- Heath care: The bill eliminates the tax penalty for not having health insurance after December 31, 2018. It also temporarily lowers the floor above which out-of-pocket medical expenses can be deducted from the current law floor of 10% to 7.5% for 2017 and 2018.
- Business tax rates: The corporate rate has been reduced to 21%.
- New Deduction for Pass-Through Income: A 20% tax deduction is allowed for income earned from sole proprietorships, limited liability companies, partnerships and S corporations. The deduction applies to the first $315,000 of income and reduces their effective marginal rate to a 29.6% maximum. Wage income is not eligible for the lower rates on business income.
- Alternative Minimum Tax: The exemption amounts for AMT are increased to $109,400 for joint filers and $70,300 for single taxpayers. The bill eliminates the corporate alternative minimum tax.
- Capital Gains: The bill retains maximum rates of 0%, 15% and 20% and breakpoints on net capital gains and qualified dividends.