As the Tax Cuts and Jobs Act, introduced on November 2, 2017, makes it was through the Senate today for a final vote* before heading to President Trump's desk, most of you are probably wondering how the new tax bill may affect your business and personal tax liability. In order to help those wondering minds, I present the following brief summary of some key changes:
What does the new tax bill mean for you, individually:
According to Congress’ official website, the new tax bill, as written, changes the following as it relates to an individual’s taxes:
Replace the 7 existing tax brackets to 4 brackets (12%, 25%, 35%, and 39.6%).
Increases the standard deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly and surviving spouses.
Repeals the deduction for personal exemptions, but attempts to soften the blow by increasing the child tax credit from $1,000 to $2,000 and by establishing a new family tax credit.
Establishes a 25% maximum rate on the business income of individuals.
Repeals the overall limitation on certain itemized deductions.
Limits the mortgage interest deduction for debt incurred after November 2, 2017, to mortgages of up to $500,000 (currently $1 million).
Repeals the deduction for state and local income or sales taxes not paid or accrued in a trade or business.
Repeals the deduction for medical expenses.
Consolidates and repeals several education-related deductions and credits.
Repeals the alternative minimum tax.
Repeals the estate and generation-skipping transfer taxes in six years.
So what does the new tax bill mean for you, if you own a home?
This is good for you, if you live in a state with low property taxes. The final bill would keep the mortgage interest tax deduction, but would only allow interest on a mortgage up to $750,000, lowered from $1 million, to be deducted.
So what does the new tax bill mean for you, if you have health insurance?
Your insurance premiums may go up. The bill would eliminate the Affordable Care Act’s individual mandate, a requirement that everyone must buy insurance or pay a tax penalty. This change would be a significant blow to the health care law, resulting in an estimated 13 million more people without insurance and higher average premiums.
So what does the new tax bill mean for you, if you make charitable contributions?
The bill would keep deductions for charitable gifts if you itemize deductions instead of taking the standard deduction. But the new tax bill proposes to nearly double the standard deduction, which means that fewer people would claim charitable deductions.
So what does the new tax bill mean for you, if you earn more than $500,000 per year?
Many households in your income range pay the alternative minimum tax, which is meant to keep you from using loopholes to avoid paying taxes. President Trump’s original tax plan and the House bill would have eliminated it, but the final bill would keep this tax, raising the threshold so that fewer households would pay it. The tax would mostly affect individual taxpayers earning at least $500,000 and married couples earning at least $1 million.
So what does the new tax bill mean for you, if you are a business owner?
According to Congress’ official website, the new tax bill, as written, changes the following as it relates to a business’ taxes:
Reduces the corporate tax rate from a maximum of 35% to a flat 20% rate (25% for personal services corporations)
Allows increased expensing of the costs of certain property.
Limits the deductibility of net interest expenses to 30% of the business's adjusted taxable income.
Repeals the work opportunity tax credit.
Terminates the exclusion for interest on private activity bonds.
So what does the new tax bill mean for you, if you have high unreimbursed business expenses?
Currently, unreimbursed business expenses that exceed 2% of your income are deductible. The new tax bill would eliminate these deductions.
So what does the new tax bill mean for you, if you own an LLC?
The new tax bill would allow people with “pass-through” business income to deduct 20 percent of that income from their taxes.
So what does the new tax bill mean for you, if you project your estate to be valued at more than $5.6 million?
The bill doubles the amount that your beneficiaries get to keep tax free, from $5.6 to $11.2 million. This alleviates the need to create irrevocable trusts, thereby creating a lifetime gift that is not included in your gross estate, but does not alleviate the need to create trusts to avoid probate.
Thank you for reading. If you would like to know more about the upcoming changes in the new tax bill, please contact your local business and estate planning attorney.
*The Senate made changes that need to be approved by the House before going to the President's desk for approval.