The ‘Tax Cuts & Jobs Act’ Bill
The ‘Tax Cuts and Jobs Act’ bill has been passed by the House and the Senate and signed into law by President Trump. The new tax law contains many changes, but it will not take effect until year 2018. While corporations will be taxed at a flat 21% tax rate, the following discussion focuses on other changes for individuals and small businesses.
Tax Reform Highlights
Income Tax Brackets & Rates
- The bill maintains a total of seven tax brackets for different income levels, but tax rates are generally lower. Most tax rates have been reduced from one to four percent, depending on your taxable income.
The Standard Deduction
- The standard deduction was nearly doubled for single and married taxpayers, and now stands at $12,000 and $24,000, respectively.
- With the increase in the standard deduction, less taxpayers will be claiming itemized deductions beginning in year 2018. The itemized deductions have been changed to make it slightly easier to claim medical expenses. However, an aggregate limit of $10,000 has been imposed on the deduction for state and local property and income taxes.
- The personal exemption of $4,100 for each taxpayer, their spouse and any dependents is being eliminated.
Child Tax Credits
- Child tax credits have increased from $1,000 to $2,000 for each child under the age of 17. The tax credit phaseout has also been increased to start at a higher income limit. These changes help to offset the impact of the personal exemptions being eliminated.
Pass-Through Entities Deduction
- Small businesses may be eligible for a 20% tax deduction. This may include sole proprietors, LLCs, S Corporations, and partnerships. However, this tax deduction has limitations depending upon the total business net income and type of service offered.
The Affordable Care Act (ACA) or Obamacare
- The individual penalty or ‘shared responsibility payment’ of $695 for not having health care coverage will be eliminated effective on January 1, 2019.
What Else To Know About Tax Reform?
The above discussion highlights some of the major changes of the tax reform bill. The following link contains further details on the new tax brackets and other accompanying changes (http://www.factcheck.org/2017/12/guide-tax-changes/).
How Will Tax Reform Impact Me?
With all of these moving parts, it is not easy to predict where you may end up. However, given the lower overall tax rates, a majority of taxpayers can anticipate a reduction in tax liability for year 2018. The magnitude of the change will depend largely on your specific tax bracket, available deductions, and income levels. Do not hesitate to contact your tax adviser if you want a more personalized analysis.