President Trump signed the “Tax Cuts and Jobs Act” into law on Dec. 22, as noted and summerized from a report by Investopedia. The Senate passed the bill on Dec. 20 by a party-line vote of 51 to 48. The House passed the bill later in the day by a vote of 224 to 201. No House Democrats supported the bill, and 12 Republicans voted no, most of them representing California, New York and New Jersey. (Taxpayers who itemize and rely on the state and local tax deduction in these high-tax states will have their state and local tax deductions capped at $10,000 or $5,000 if Married Filing Separate). Generally speaking, some are concerned that this overhaul is forecasted to raise the federal deficit by a significant amount, while others say the tax cuts will significantly boost the economy and produce growth across many industries.
The law cuts corporate tax rates permanently and individual tax rates temporarily until 2025 when those individual rates would expire if they’re not renewed. The law permanently removes the individual mandate, a key provision of the Affordable Care Act.
It should be noted that the impact from the TCJA is not expected to occur until the 2018 (not 2017) tax filing.
There is a significant amount of material as it relates to the Tax Cuts and Jobs Act” (“TCJA”), and this article can only provide a brief sketch.
How the Tax Cuts and Jobs Act impacts U.S. Tax Returns
Note the following points that are affected by the TCJA and will be discussed in future newsletter articles.
- Tax brackets are changed and tax rates are reduced for most taxpayers, some quite significantly. For example, in the old tax brackets a Married Filing Jointly taxpayer who made between about $38,000 and $92,000 fell in the 25 percent tax rate. With the new brackets, most taxpayers in that range (up to around $77k) would slide down to the 12 percent tax rate. See this snapshot of the new brackets and rates for details.
- Personal and dependent exemptions are eliminated.
- Child tax credit increased through 2025.
- New credit for non-child dependents available through 2025.
- Standard deduction is doubled through 2025. (For example, Married Filing Jointly had a standard deduction of $12,000 previously. Now it is $24,000.)
Many itemized deductions eliminated, limited or modified:
6. Fully Eliminated
a. Miscellaneous Itemized Deductions
b. Personal Casualty and Theft Losses
a. State and Local Income Taxes
b. Home Mortgage Interest
a. Charitable Contributions
b. Gambling Losses
c. Medical Expenses
Many “Above-the-line” deductions eliminated, limited or modified:
9. Fully Eliminated
b. Tuition and Fees
c. Domestic Production Activities Deduction (DPAD)
10. Most education benefits remain the same, others modified. For example, the tax bill modifies this rule governing the discharge of student loans by including discharges on account of death or disability, so that such discharges are also excluded from taxable income.
11. Health care penalty eliminated.
12. Self-employed taxpayers may claim a new deduction for qualified business income.
13. Taxpayers may benefit by adjusting withholding and estimated taxes.
In conclusion, with such sweeping changes, it would be advisable that the taxpayer start meeting with their tax professional to undertake a planning process that centers on the taxability of their 2018 tax year.