What the New Tax Bill Means to You

 

The Tax Cuts and Jobs Act

A few days before Christmas, the Senate passed the Tax Cuts and Jobs Act by a party-line vote of 51 to 48.  Regardless of your political affiliation, it's hard to argue that this is the biggest tax reform our country has seen in the last 30 years.

After heated debate in the Senate and the House of Representatives for the last few months, both sides finally hammered out legislation that will take place in 2018 and beyond.  Some the changes, like personal tax breaks, are set to expire in 2025.  Others, like the corporate tax cut are permanent.  The bill was drawn up in this fashion to comply with "reconciliation" rules.  Doing so blocks Democratic filibuster, which the Republicans would not have enough votes to overturn.

 

Economic Implications

By most all accounts, the bill is expected to raise the federal deficit by as much as $2 trillion over the next ten years.  Republicans claim that the tax cut will create a massive amount of economic growth, generating tax receipts that offset deficit growth.  This remains to be seen, of course.  Here are three perspectives to consider:

  • The Congressional Budget Office's analysis suggests that the tax cut would add $1.4 trillion to the deficit by 2027.  This estimate does not include the amount that'd be offset by the economic growth spurred by tax cuts.
  • Treasury Secretary Steven Mnuchin predicts a “net reduction” to the national debt as a result of the new bill.

  • Democratic leaders are claiming the tax bill is a "middle class con job", and are very doubtful that economic growth will as strong as the Republicans claim.

  • Speaker Paul Ryan told NBC’s Savannah Guthrie that “nobody knows” if the tax bill will create enough economic growth to negate its cost.

 

Highlights of the Tax Cut and Jobs Act

  • The bill creates a single corporate tax rate of 21%, beginning in 2018, and repeals the corporate alternative minimum tax. Unlike tax breaks for individuals, these provisions would not expire.

The bill retains the current structure of seven individual income tax brackets, but in most cases, it lowers the rates:

·         the top rate falls from 39.6% to 37%;

·         the 33% bracket falls to 32%;

·         the 28% bracket falls to 24%;

·         the 25% bracket falls to 22%;

·         the 15% bracket falls to 12%; and

·         the lowest bracket remains at 10% and the 35% bracket remains unchanged.

  • The bill raises the standard deduction to $24,000 for married couples filing in 2018 (from $13,000 under current law), to $12,000 for single filers (from $6,500), and to $18,000 for heads of household (from $9,550). These changes expire after 2025.
  • The bill ends the individual mandate, a provision of "Obamacare" that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. While the mandate technically remains in place, the penalty falls to $0.

  • The bill temporarily raises the child tax credit to $2,000, with the first $1,400 refundable, and create a non-refundable $500 credit for non-child dependents.

  •  The bill limits the application of the mortgage interest for married couples filing jointly to $750,000, down from $1,000,000.

  • The bill caps the deduction for state and local taxes at $10,000 through 2025.

  • The bill temporarily raises the exemption amount and exemption phase-out threshold for the Alternative Minimum tax – for married couples filing jointly, the exemption will rise to $109,400 and phase-out would increase to $1,000,000.

  • The bill temporarily raises the estate tax exemption for single filers to $11.2 million from $5.6 million in 2018, indexed for inflation. This change will be reversed after 2025. 

 

What the New Tax Bill Means to You

In the aggregate, the Tax Cut and Jobs Act will eliminate many itemized deductions and replace them with the standard deduction.  That means that the Republicans' sound byte of being able to file your taxes on an index card is likely true.  Claiming the standard deduction is far less complicated. 

For tax planning purposes, that means that it may make sense to "lump" your itemized deductions together in certain years, if possible.  Since you can always claim the standard deduction as a fall back, lumping together your deductions in an effort to itemize once every few years may make sense.  

Additionally, tax planning for business owners will change.  The well covered 20% tax rate on "pass through" entities gives business owners a larger incentive to take money out of their business as profit distributions, as opposed to W-2 income.