Tax Law Changes that May Affect You


 

Single Filers
Old Law   New Law
Tax Bracket Taxable Income   Tax Bracket Taxable Income
10% Up to $9,325 10% Up to $9,525
15% $9,326 – $37,950 12% $9,526 – $38,700
25% $37,951 – $91,900 22% $38,701 – $82,500
28% $91,901 – $191,650 24% $82,501 – $157,500
33% $191,651 – $416,700 32% $157,501 – $200,000
35% $416,701 – $418,400 35% $200,001 – $500,000
39.6% Over $418,400 37% Over $500,000

 

Married, Filing Jointly
Old Law   New Law
Tax Bracket Taxable Income   Tax Bracket Taxable Income
10% Up to $18,650 10% Up to $19,050
15% $18,651 – $75,900 12% $19,051 – $77,400
25% $75,901 – $153,100 22% $77,401 – $165,000
28% $153,101 – $233,350 24% $165,001 – $315,000
33% $233,351 – $416,700 32% $315,001 – $400,000
35% $416,701 – $470,700 35% $400,001 – $600,000
39.6% Over $470,700 37% Over $600,000

 

On December 22, 2017, President Donald Trump signed into law his first major piece of legislation, the Tax Cuts and Jobs Act.  The new law represents the most significant tax changes in the United States in over 30 years.  The bill got its name from the belief that cutting individual and corporate taxes will be a springboard for job creation.  Here are some key features of the new tax law that may affect you.

There was wide speculation during the formulation phase of the new tax code that it would reduce the number of tax brackets, however in its final format the new tax code maintains seven brackets with mostly lower tax rates.  The new rates remain in effect from 2018 through 2025.  Since the new tax rates have not been made permanent, the old tax rates would return in 2026 without new legislation.

Personal Exemption

The personal exemption is a tax deduction that was used to reduce taxable income.  The new tax law has eliminated the personal exemption through 2025.  In 2017, the exemption amount was $4,050 each for taxpayers and their dependents.  These exemptions were subject to phase-out limits based on income.

 

Standard Deduction

The standard deduction is a dollar amount that you can deduct from your income, lowering the amount of income on which you are taxed.  This does not apply to taxpayers who itemize their deductions.  Prior to the new tax law, the standard deduction for a single taxpayer was $6,350, or $12,700 for a married couple filing jointly.  In an effort to simplify the tax code, the standard deduction has roughly been doubled for all taxpayers.  A single filer is entitled to a $12,000 deduction, whereas a married couple filing jointly will be eligible for a $24,000 deduction.  The increased standard deduction levels will be in place through 2025.

 

Limits on Itemized Deductions

Prior to the new tax law, itemized deductions could have been limited or phased out.  For example, a married couple filing jointly or qualifying widows who had an adjusted gross income exceeding $313,800 saw their total itemized deductions reduced.  The new tax law repeals itemized deduction limits through 2025.

 

Medical Expense Deduction

Unlike most of the other tax law changes that start in 2018, the medical expense deduction is retroactive to 2017.  The new threshold for taking the deduction has been reduced to 7.5% from 10% of adjusted gross income (AGI).  For example, if a taxpayer has an AGI of $75,000, they can deduct unreimbursed out-of-pocket medical expenses exceeding $5,625 instead of $7,500 as set by the prior law.  The reduced threshold is temporary and is set to expire on January 1, 2019.

 

Mortgage Deduction

For many taxpayers who itemize, mortgage interest is their single biggest tax deduction.  For existing mortgage holders, there is no change.  For mortgages and home equity debt taken out after December 15, 2017, the interest deduction is limited to $750,000 of debt, down from the previous $1 million limit.  In addition, the interest paid on home equity debt is deductible only if used to buy, build, or improve the home.

 

State and Local Tax Deduction

Prior to tax reform, taxpayers were able to fully deduct their local property taxes, as well as state and local income or sales taxes.  The new law keeps the state and local tax deduction in place but caps the deductible amount to $10,000.

 

Estate & Gift Tax

Under the previous estate and gift tax law, the tax exemption threshold would apply to an estate that was valued at or under $5.49 million for an individual and $10.98 million for a married couple.  The new law temporarily wipes out the estate tax for most taxpayers, by increasing the tax thresholds to $11.2 million for individual and $22.4 million for a married couple.  It is also set to expire at the end of 2025.

 

So, will the Tax Cuts and Jobs Act succeed?  In the short term, the Tax Policy Center projects that the typical taxpayer in each income group will save money from the tax-bracket changes.  As for job creation, the jury is still out.  Then again, by permanently cutting the top corporate tax rate from 35% to 21%, the new tax law makes the U.S. competitive globally.  It is hard not to feel optimistic.

Dan Krstevski, CFP®