Just in time for Christmas, we’ve received the year’s hottest item—a brand new tax bill! No matter your take on it, the President is expected to sign it into law before the end of the week, and your 2018 taxes (the ones we’ll file in 2019) are certain to look different than in recent years. Why? Here is a list of 10 major updates causing the change.
1. Individual tax rates are going down.
The structure of our tax system will remain virtually the same. The new law retains a seven-bracket arrangement, each of which is subject to a different tax rate. What is changing are the sizes of those tax brackets and the rates themselves. Beginning in 2018, the new brackets for single and married filers are as follows:
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
In most cases, this means your taxes are going down. While highly individualized, some estimates indicate that a middle-class family could see a 2% to 5% decrease in their taxes (and thus an increase in their take-home pay) on their 2018 taxes. For a more accurate estimate, you could give this calculator a try.
2. The standard deduction is going up.
Perhaps the more significant change is to the standard deduction. Currently, the standard deduction is $6,350 for single filers and $12,700 for married couples filing jointly. In 2018, these amounts will nearly double to a $12,000 deduction for single filers and $24,000 for those filing jointly.
Experts believe this change will create a significant drop in the number of Americans who itemize their deductions. Of the nearly 44 million Americans who currently do so, 30 million would no longer benefit from itemizing their returns.
3. The child tax credit is increased.
Under current law, parents are entitled to take a credit of $1,000 for each of their children under age 17. The new law doubles this amount to $2,000.
The new law also significantly raises the threshold for claiming the full credit. Currently, the phase‑out begins at $75,000 for single parents and $110,000 for married couples. These amounts are raised to $200,000 and $400,000, respectively.
Additionally, a new $500 tax credit is created for non-child dependents (for example, college students, children with disabilities, or elderly parents). This credit could help soften the blow some tax payers feel when they are no longer entitled to the ordinary child tax credit.
4. Almost everyone is exempt from the estate tax.
Despite earlier predictions, the estate tax remains. However, the exemption amount is more than doubled to $11.2 million per individual. This means that, in 2018, a married couple can now pass almost $22.5 million to their descendants, estate tax free.
5. The personal exemption is eliminated.
On your 2017 tax filing, you are entitled to an exemption of $4,050 for yourself, your spouse, and any dependents you have. Beginning in 2018, these exemptions are no longer available. For larger families, this elimination could create an increase in taxes rather than a decrease.
6. The state and local tax deduction is capped.
For those filers who continue to itemize, the State and Local Tax Deduction will continue to be available but is capped at $10,000. Therefore, unless a single filer has an additional $2,000 in deductions, or a married couple has an additional $14,000 in deductions, the standard deduction would be more beneficial.
7. The cap on the mortgage interest deduction is reduced.
Today, homeowners can deduct the interest on up to $1 million in mortgage debt. Going forward, this amount is reduced to $750,000. The deduction for interest on home equity loans is eliminated.
8. The individual mandate is no more.
The requirement that everyone purchase health insurance or else incur a tax penalty is a thing of the past. Experts believe this will save money as the government will spend less on Medicaid and Insurance Subsidies.
9. The corporate tax rate is slashed.
An entirely separate blog post could be written on the changes to corporate taxation. Most notable, though, is the reduction in the corporate tax rate. Today corporations are taxed at 35%. Beginning in 2018, that amount is dramatically reduced to 21%.
10. The tax liability on pass‑through businesses is lowered.
Certain owners of pass‑through businesses (most commonly Partnerships, S-Corporations, and LLCs) are now entitled to a 20% deduction of their share of business taxes on their individual tax returns. The ability to use this new deduction, however, is riddled with exceptions. Most importantly, the deduction may not be taken by anyone in a service business unless their taxable business income is less than $157,500, if single, or $315,000, if married.
To prevent abuse of this new deduction, limits are placed on the amount of income subject to the deduction. Thus, owners and partners who draw a salary from their business supposedly would not benefit from recharacterizing their salary as business profits. Experts are unsure whether this will be true.
Overall, these changes to the tax code are some of the most significant changes in over 30 years. For the majority of you, the new tax law should mean more money in your pocket. However, if you are curious to know exactly how these changes will impact you, your estate, or your business, the team at NC Planning is here to help you.
Tax Reform: Impacts to and Opportunities for Business Owners and Individuals
Are you interested to know how the recently passed tax reform legislation will affect you, your family, or your business? Come find out at our seminar January 17, 2018, from 6 – 7 pm at the McKimmon Center in Raleigh. Click below to register.
Our attorneys are here to help evaluate your tax planning and provide strategic advisory services for both your estate and business.