Lower Tax Rates Under Tax Reform Bill: What Tax Practitioners Need to Know

Tax Law and News congress

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 Dec. 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. Learn more about this from the IRS.
  • 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.

Married Joint Filers

Single Filers

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Comments (15) Leave your comment

  1. I haven’t heard anything yet about the self-employed health insurance deduction. Is it still part of the new tax plan?

  2. Wish people would stop saying the corporate tax rate has been cut. Mine increased from 15% to 21% because they eliminated brackets with variable rates. Tax increase for small business, tax cut for large ones or rich ones.

    1. Your claims are suspect to say the least. I would need to see real numbers to even understand what you are saying. But you make a good point in re “corporate tax rate”. There is a huge difference between C Corp and S corp so definition of terms becomes very important.
      BTW – you may need to re-work your own entity structure to take advantage of the new law.

  3. depending on the dependents ages, the TP may also receive a $2k per children tax credit if I have read the treatise correctly

  4. Students claimed as dependents currently receive their standard deduction and the parents receive the exemption. Will working college and high school students receive the full $12,000 standard deduction? What is the new cut off age for dependents. I haven’t spotted that yet in the paperwork.

  5. When will the Proseries software incorporate the tax law changes for 2018 estimated tax purposes?

    1. Hi, Marsha. We will have our Tax Planner solution, which enables you to easily project your clients’ future tax liability under multiple scenarios. We are targeting to release the updated Tax Planner by Mid-February 2018. Thanks!

      1. I know PTO can’t personally answer this question but I am curious to know if other tax practitioners plan to charge their clients a fee for providing guidance using the tax planner solution. It will be very helpful for taxpayers to know so why not capitalize from the need.

  6. I would like to know why there not been an outcry from taxpayers about losing the PERSONAL DEDUCTION. ie, $4,050.00 per taxpayers and dependents. A couple filing a joint return with two dependents are losing $16,200. deduction. Is this correct?

    1. Hi Joe, you are correct that the personal exemption has been suspended. However, standard deductions have increased. In general, tax professionals will need to run projections for each of their clients to determine how their overall tax liability will change year over year.

    2. If a couple with 2 kids files a 2017 tax return, they will have a total deduction of $28,200.($12,000 plus @16,200). When this same couple files for 2018, their deduction will be $24,000. This adds up to a $4,200 decrease. Am I correct?l

      1. In this tax law change, there is also the child tax credit increase of $1,000. If the 2 children are under 17 at the end of 2018, that is a $2,000 increase in the CTC. Credits reduce tax dollar for dollar. If we wanted to see what amount of exemption or deduction reduced tax in the same manner as this $2,000 of credit, we would take $2,000 divided by 12% tax rate = $16,667. In the example you give, there would be a ($4,200) decrease and $16,667 increase for a net addition of $12,467 income shielded from tax. $12,467 times 12% rate = $1,496 less tax liability

        If the kids/dependents are 17+, they receive the new $500 family credit each. Calculating as above, $1,000 in credit divided by 12% = behaves like an $8,333 exemption. The above ($4,200) decrease and $8,333 increase nets to $4,133 additional income shielded from tax. $4,133 times 12% = $496 less tax liability.

        Every situation is different. I framed this thinking with the family income in the article. There are other changes in play as well. Such as expanded size of 10% bracket and 15% bracket reducing to 12%. Tax projections need to be run for each client.

      2. Lower deductions if they do not itemize deductions. However, if the two kids are under 17 their child tax credits increase by $2,000. If the are in the new 12% tax bracket X $4,200 = $504 increase in tax before credits, decrease in tax $1,496 after applying the $2,000 increase in tax credits. New law saves them $1,500. Additionally, their tax rates on income over their income are lower.

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