By Timothy M. Dilley, CPA, Cordell, Neher & Company, P
The tax reform legislation that Congress approved in December of 2017 was the largest change to the tax system in more than three decades. The last time the U.S. tax code saw such a significant reform was under President Reagan in 1986. Under this new legislation, substantial changes have been made to both individual and corporate tax rates.
The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. We have highlighted a few of the most pertinent details below. Please keep in mind, the purpose of this article is to summarize several key provisions.
Tax Bracket Rates. While taxpayers will still fall into one of seven tax brackets based on their income, the rates have changed. Some of the brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Standard Deduction. The standard deduction has nearly doubled. For single filers it has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.
Personal Exemption. Under the prior tax code, a taxpayer could claim a $4,050 personal exemption for themselves, their spouse and each of their dependents, thus lowering their taxable income. Under the new tax code, the personal exemption has been eliminated. For some families, this will reduce or counter the tax relief they receive from other parts of the reform package.
State and Local Tax Deduction. The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.
The Child Tax Credit. The child tax credit has been expanded, doubling to $2,000 for children under 17. It’s also available to more people. Single parents who make up to $200,000, and married couples who make up to $400,000 can claim the entire credit, in full.
Non-Child Dependents. A new tax credit is available for non-child dependents. Taxpayers, such as elderly parents, can claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.
Mortgage Interest Deduction. Going forward, anyone purchasing a home will only be able to deduct the first $750,000 of their mortgage debt. This is down from $1 million.
Pass-through Entities. The owners, partners and shareholders of S-corporations, LLCs and partnerships will receive a tax break. Those who pay their share of the business’ taxes through their individual tax returns will have a 20% deduction.
To ensure business owners do not abuse the provision, the legislation has included additional terms to this provision.
Bonus Depreciation. The Bonus depreciation will increase from 50% to 100% for property placed in service after September 27, 2017, and before January 1, 2023, when a 20% phase-down schedule will begin. The previous rule that made bonus depreciation available only for new properties was also removed.
What Remains the Same?
Student Loan Interest. You can still deduct Student Loan Interest – the deduction for this will remain at a max of $2,500.
Medical Expenses. The deduction for medical expense was untouched. Filers can deduct medical expenses that exceed 7.5% of their adjusted gross income.
Home Sellers. Homeowners that sell their house and make a profit can exclude up to $500,000 (or $250,000 for single filers) from capital gains. This still requires that it is their primary home; and they have lived there for at least two of the past five years.
What Does This All Mean?
Although doubling the standard deduction will arguably simplify the process of filing taxes for individuals, there are still deductions and credits to consider. More so, the filing for small businesses can potentially become more complicated.
It’s important to remember that each taxpayer scenario is unique. The professionals in our office can answer the questions you may have regarding the individual, estate and corporate tax provisions outlined in the tax reform bill. Contact us today to schedule a consultation.