On December 22, 2017, President Trump signed a new tax law, the Tax Cuts and Jobs Act, which made permanent corporate cuts and various individual changes that will expire at the end of 2025. The bill represents the most significant tax changes in the United States in more than 30 years with new tax brackets, modified deductions and credits, and eliminations of personal exemptions. Here is a summary of the most significant changes that will affect you as a taxpayer and what to look for when filing your upcoming tax returns.
New Brackets for Income Taxes/Increase of Standard Deductions
The new Act keeps the seven previous tax brackets, but lowers tax rates for those brackets which means individuals will benefit from lower tax levels at each of the brackets. For example, individuals that earn $500,000+ will now be taxed 37% rather than 39.6% for taxable income in excess of $500,000 and will also pay lower levels of tax for income up to that $500,000 bracket level. The income levels will rise each year with inflation, but they will rise slower than in the past because the Act uses the chained consumer price index as reference. Further, the standard deduction is being doubled from $6,350 for single taxpayers/ $12,700 for married filing jointly to $12,400/$24,800.
Married Penalty is gone for Most Americans
One interesting component of the new tax brackets is that the so-called marriage penalty, which many Republican leaders wanted to eliminate, is, for the most part, gone. Since married couples have their incomes combined rather treated as individual incomes, it used to be that they were bumped up in their tax brackets and taxed at higher rates than their actual individual incomes would have transcribed. Under the new tax brackets, many couples would avoid this outcome and remain in their original tax brackets. This change has been applied to every tax bracket, except the two highest tax brackets. Meaning, the marriage penalty has effectively been eliminated for everyone except for married couples earning more than $400,000.
State and Local Taxes Mostly Eliminated
Perhaps one of the most controversial aspects of tax reform was the drastic change to the “SALT” (state and local taxes) deduction. The final version of the bills caps the total deductible amount to $10,000, including income, sales, and property taxes. This is detrimental to many New York and California residents that will have to choose between property taxes and income or sales tax while only being able to deduct up to $10,000. It used to be that residents in these high-tax states were able to deduct all of SALT – that will no longer be the case.
Mortgage Interest Reduction
One of the more noteworthy new deductions is that the new tax law reduces the limit on mortgage interest to the first $750,000 of the loan from the previous $1million threshold. In addition, interest on home equity lines of credit can no longer be deducted at all; previously up to $100,000 of home equity debt could be considered. As a result of this, fewer people will be able to take advantage of the mortgage interest deduction, which could result in lower housing prices. Despite this new deduction, it only applies to mortgages received after December 15, 2017; preexisting mortgages are grandfathered in.
Child Tax Credit Increased & Elder Care Modified
The new law increases the Child Tax Credit from $1,000 to $2,000 and even permits parents who do not earn enough to pay taxes to claim the credit up to $1,400. Furthermore, it allows parents to use 529 saving plans for tuition at private and religious K-12 schools. The new law also covers funds for expenses of home-schooled students. With regard to elder care, individuals now have a $500 credit for each non-child dependent. The credit is geared to help families caring for elderly parents.
Given the increase of the standard deduction and that many itemized deductions are being eliminated, it is estimated that roughly 94% of taxpayers will claim the standard deduction in 2018. This elimination of itemized deductions means a simplification of tax returns for many lower-income taxpayers and many may try to prepare their own taxes.
According to the Tax Foundation, the new tax Act will help higher-income families the most. Those in the 95-99% income range will receive a 2.2 increase in after-tax income compared to people in the 20-80% income range projected to receive a 1.7 increase. Although under the new law tax rates are lowered for everyone, they are lowered more for the highest-income taxpayers, which detracts from the previous tax law that held the wealthier more accountable. Despite this disparity, The U.S. Treasury reported that the bill would bring in $1.8 trillion in new revenue over 10 years, as a bigger economy leads to bigger tax bills, and projected economic growth of 2.9% a year on average. Many experts, however, have questioned the validity of the underlying assumptions on which this projection is based and have predicted that the bill will increase the US deficit.
This article has been featured on Ynet (in Hebrew) – see link below:
For more information on the new tax law, contact Alon Harnoy.