Summary of Tax Bill and Recommended Considerations

On December 19, 2017, Congress passed the final version of the Tax Cuts and Jobs Act.  The Senate passed it early on December 20, 2017. 

The final bill cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual tax rate will drop to 37 percent. The tax bill cuts income tax rates, doubles the standard deduction, and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.

Here's a summary of key aspects of the Bill:

Income Tax Brackets

The final tax bill keeps the seven income tax brackets but lowers tax rates.

These rates revert to the current rate in 2026. Until then, the plan creates the following chart.

Income Tax Rate

Income Levels for Those Filing As:

Current          Tax Bill              Single                                              Married-Joint

10%                 10%                   $0-$9,525                                       $0-$19,050

15%                 12%                    $9,525-$38,700                              $19,050-$77,400

25%                22%                    $38,700-$82,500                           $77,400-$165,000

28%                24%                    $82,500-$157,500                          $165,000-$315,000

33%                32%                    $157,500-$200,000                       $315,000-$400,000

33%-35%        35%                    $200,000-$500,000                     $400,000-$600,000

39.6%             37%                    $500,000+                                     $600,000+

The bill eliminates most itemized deductionsThat includes moving expenses, except for members of the military. Those paying alimony will lose their deduction, but those receiving alimony will no longer be taxed on the income. This change begins in 2019 for divorces signed in 2018.

It keeps deductions for charitable contributions, property taxes, mortgage interest, and retirement savings. It limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren't affected. 

It keeps the deduction for student loan interest

Taxpayers can deduct up to $10,000 in state and local taxes. They must choose between property taxes and income or sales taxes. 

The bill expands the deduction for medical expenses for 2017 and 2018. It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income. Currently, people can deduct medical expenses that are 10 percent or more. At least 8.8 million people used the deduction in 2015. 

It doubles the standard deduction. A single filer's deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000.  It reverts back to the current level in 2026. As a result, 94 percent of taxpayers will take the standard deduction. The National Association of Home Builders and the National Association of Realtors opposed this. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. That could lower housing prices. But this could be a good time to do that. Many people are concerned that the real estate market is in a bubble that could lead to another collapse.

The bill repeals the Obamacare tax on those without health insurance. Without the mandate, the Congressional Budget Office estimates 13 million people would drop their plans. The government would save $338 billion by not having to pay their subsidies.

It eliminates personal exemptions. Taxpayers currently subtract $4,150 from income for each person claimed. Families with many children would pay higher taxes under the bill despite the increased standard deductions. 

The bill doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. That would help the top 1 percent of the population who pay it. These top 4,918 tax returns contribute $17 billion in taxes. The exemption reverts to current levels in 2026.

It keeps the Alternative Minimum Tax. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to current levels in 2026.  

Child and Elder Care Deductions 

The final bill increases the Child Tax Credit from $1,000 to $2,000. Credit is refundable up to $1,400. It increases the income level from $110,000 to $400,000 for married tax filers.  

The bill allows parents to use 529 savings plans for tuition at private and religious K-12 schools. They can also use the funds for expenses for home-schooled students.

It allows a $500 credit for each non-child dependent. The credit helps families caring for elderly parents. 

Business Taxes

The final tax bill lowers the maximum corporate tax rate from 35 percent to 21 percent, the lowest since 1939. The United States has one of the highest corporate tax rates in the world. But most corporations don't pay that much. On average, the effective rate is 18 percent.

It raises the standard deduction to 20 percent for pass-through businesses. The deductions are limited once the income reaches $157,500 for singles and $315,000 for joint. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds

The bill limits corporations' ability to deduct interest expense to 30 percent of income.

It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

The bill eliminates the corporate AMT.  The corporate AMT had a 20 percent tax rate that kicked in if tax credits pushed a firm's effective tax rate below that level.

It advocates a change from the current "worldwide" tax system to a territorial system. Under the worldwide system, multinationals are taxed on foreign income earned. They don't pay the tax until they bring the profits home. As a result, many corporations leave it parked overseas. Under the territorial system, they aren't taxed on that foreign profit. They would be more likely to reinvest it in the United States. This will benefit pharmaceutical and high-tech companies the most.  The tax bill allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.

Additional Details

The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025.

Among individuals, it would help higher income families the most. Everyone gets a tax cut in 2019. But in 2021, taxes will increase on those making $30,000 or less. The lower tax rate won't make up for the deductions and credits they lose. By 2023, costs will rise on everyone who makes less than $40,000 a year.

The increase in the standard deduction would benefit 6 million taxpayers. That's 47.5 percent of all tax filers, according to Evercore ISI. But for many income brackets, that won't offset lost deductions.

The bill ignores the lowest-income families. That's because more than 70 million Americans don't make enough to pay taxes. The plans also don't help the third of taxpayers who have incomes that fall below current standard deduction and personal exemptions. 

It is estimated the bill increases the deficit by almost $448 billion over the next 10 years. The tax cuts themselves would cost $1.47 billion. But that's offset by $700 billion in growth and savings from eliminating the ACA mandate. The Tax Foundation said the plan would boost GDP by 1.7 percent a year. It would create 339,000 jobs and add 1.5 percent to wages.

The bill could help immigrants who were protected by Deferred Action for Childhood Arrivals. One of Trump's immigration policies is to end the program in March 2018. Senator Jeff Flake, R-Ariz., got Senate leaders to agree to make the program permanent in exchange for his vote.

Recommended Considerations

There are certainly a number of factors to consider and each individual or couple’s situation will be different.  However, there are a few key areas you might want to discuss with your CPA/ tax preparer to see if they make sense for your personal tax situation in order to take action on or before December 31st.

  1. Consider accelerating certain deductions into 2017
    • Payment of property taxes  
    • 4th quarter 2017 estimated state and local income taxes (typically due Jan 15, 2018).  
    • Charitable contributions (if you will no longer be itemizing your taxes in 2018)
  2. Possibly deferring income (where legally possible) into 2018 where lower tax rates may apply

Again, we just want to thank you for affording all of us at Trinity the opportunity to serve you.  We hope you have a great 2018!