A big middle-class tax cut was one of the promises central to the campaign of President Trump. While political pundits are divided on whether the new legislation constitutes a middle-class benefit or a boon to businesses and the rich, all Americans will be affected in some way by the legislation.
Increase in Take-Home Pay
The immediate affect for most Americans will be to our paychecks. Initially, most everyone (the IRS estimates 90% of Americans) will see an increase in take-home pay, with the largest discount going to those in the highest income brackets. The law reduces the income tax rates in most of the taxable income brackets for individuals. Starting this year (2018), the Act reduces the withholding from your pay.
If you would like to compare the 2017 tax bracket and rates to 2018, click here to find an article from Business Insider providing comparison tables.
Note that the tax cuts are set to expire in 2026, and some experts believe you will be paying more taxes incrementally during the years the Act is in effect.
Changes in Deductions and Exemptions
The new law doubles the standard deduction for all individual taxpayers and eliminates or changes the rules for many itemized deductions. As a result, it is believed that the vast majority of Americans will choose to take the standard deduction (currently, about 28% of tax filers itemize on their taxes, according to the Urban-Brookings Tax Policy Center). The Act also completely eliminates personal exemptions.
There are two major changes to itemized deductions. The deduction for local property tax, state and local income and sales taxes (SALT) is now capped at $10,000. This will trouble those who live in states with especially high income tax, especially those in New York and California where such taxes are much higher than average. The new Act lowers the cap on mortgage interest deductions from home purchases of $1 million to $750,000 (the new cap only applies to new purchase mortgages, not existing ones). Additionally, the new Act eliminates the deduction for interest on home-equity debt, such as HELOCs (home equity line of credits). 1
Wealth Transfers and Taxes
The estate tax now allows an exemption on wealth transfers of up to $10 million for an individual, double what it was in 2017. The exemption is indexed to inflation after 2011, which means the 2018 exemption is $11.2 million. The exemption doubles for couples.
Health Care and Taxes
The Act repeals the tax penalty on individuals without health insurance that was part of the Affordable Care Act. However, those who have purchased or currently enjoy high-end health insurance policies can deduct some of the cost. Some economic analysts believe that eliminating the individual mandate will cause health care premiums to rise. While most Americans have health insurance through an employer, those who must buy heath care on the open market could find insurance becoming more expensive in a few years.
The use of the popular 529 plan savings accounts has been expanded. These accounts can currently be used to invest money with tax-free growth if used for college education. The Act allows for the use of up to $10,000/year for K-12 school costs as well.
Corporate and Business Taxes
The biggest change for businesses to come out of the Tax Cuts and Jobs Act (TCJA) is the establishment of a flat 21% tax rate for corporations as compared to the 2017 top end tax rate of 35%.
Some small businesses will receive a break as well. Small businesses where the profits “pass through” to the owner used to be taxed at the individual tax rate. So if your business was doing well, your profits could be taxed at up to 40%. Under the TCJA, the maximum tax rate is now 29.6%.
The Bottom Line
Will the new tax law benefit you, and if so, how much? That depends on what you currently earn, where you live, and whom you ask.
With the reduction on WH that has taken effect earlier this year, you may want to check with a tax professional to make sure that this reduction is the correct approach given your specific tax situation.
One strategy that may be useful for some people is to “bunch” certain itemized deductions every other year, such as property tax payments and charitable deductions. This may allow you to make use of itemizing deductions in bunched years versus consistently having to use the standard deduction. Be sure to consult with a tax professional in order to determine if this might be a useable strategy for you.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.