By Robert Rhinesmith
The Tax Cuts and Jobs Act represents the largest one-time reduction in the corporate tax rate in U.S. history, from 35 percent down to 21 percent. The bill also lowers taxes for the vast majority of Americans, as well as small-business owners — at least until the cuts expire after eight years.
Under previous law, the highest rate is 39.6 percent for married couples earning over $470,700.
The new bill drops that to 37 percent and raise the threshold at which that top rate kicks in, to $500,000 for individuals and $600,000 for married couples.
Income tax rates lower
The median weekly pay for people 24 and 34 is $778, according to the Bureau of Labor Statistics. Over the course of a year that would amount to $40,456. At that income level, you’ll move from a 25% tax bracket down to 22% once the new rates take effect. The bill also increased the number of Americans who owe nothing in taxes from 44 percent today to 47.5 percent after the plan tax went into effect on January 1, 2018.
If you don’t have a lot of deductions and usually take the standard deduction, there’s more good news here: the standard deduction would nearly double to $12,000, up from $6,500. That’s assuming you’re single. If you’re married, the standard deduction rises to $24,000.
Under current law, the state and local property deduction (SALT) is unlimited. In the new law, people can deduct up to $10,000 (married couples are also limited to just $10,000). The new law allows any state and local taxes to be deducted, whether for property, income or sales taxes.
Employer tuition assistance remains non-taxable
Your employer can contribute up to $5,250 a year to your tuition for qualifying continuing education programs, and you will not pay tax on that.
Child tax credits expanded
If you do have children, or plan to soon, you’ll be eligible for the expanded child tax credits aimed at families. Depending on your tax bill you might not be eligible for the entire credit, as much as $2,000 per child, but even without a tax liability, you’ll still get $1,400 per child back.
Health care mandate repealed
There will no longer be a penalty for not having health care insurance beginning in 2019. This penalty seemed to most adversely impact those people who could not afford health insurance to begin with.
Student loan interest deduction remains
You’re allowed to claim a deduction of up to $2,500 per year on the interest paid for student loans.
This benefit phases out as your income goes up, so that by the time you’re a single earner making more than $80,000 or a couple earning $165,000, you no longer receive the deduction. It can save taxpayers as much as $625 a year.
Fewer families will have to pay the individual AMT (Alternative Minimum Tax): The AMT for individuals started in 1969 as a way to prevent rich families from using so many credits and loopholes to lower their tax bill to almost nothing. But what started out as a way to prevent the wealthiest Americans from tax dodging started to hit more and more families over time. Currently, the AMT kicks in fully for individuals earning over $120,700 and married couples earning over $160,900. That threshold is lifted to $500,000 for individuals and $1 million for married couples. (Some families in the $200,000 to $500,000 range will still have to pay AMT, but they will pay far less than they were before).
The mortgage interest deduction gets smaller: Under the previous tax code, taxpayers could deduct any interest they pay on up to $1 million worth of mortgage loans. In the final bill the cap is $750,000.
You can pass your heirs up to $22 million tax-free: In the end, the estate tax (often referred to the “death tax”), would remain part of the U.S. tax code, but far fewer families will pay it. Under current law, Americans can pass on up to $5.5 million tax-free, (that threshold is $11 million for married couples). The final bill doubled the threshold, so now the first $11 million that people pass onto their heirs in property, stocks and other assets won’t be taxed, ($22 million for married couples).
What is NOT changing:
The bill keeps in place the medical expense deduction and the graduate student tuition waivers. The final bill even makes the medical deduction a bit more generous for awhile (dropping the threshold to take the deduction from expenses over 10 percent of income to expenses over 7.5 percent of income for 2017 and 2018). After that, the medical deduction threshold reverts to 10 percent). Retirement accounts such as 401(k) plans stay the same. No changes to the tax-free amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.
The new tax bill includes some changes to federal income tax brackets. There are still seven brackets, but the rates are broadly lower and the thresholds have changed.
• For the 2017 tax year, it’s 10%, 15%, 25%, 28%, 33%, 35%, 39.6%.
• For the 2018 tax year, it’s 10%, 12%, 22%, 24%, 32%, 35%, 37%.
Robert Rhinesmith is a Registered Investment Advisor, Applewood Capital Management Associates, LLC.