The US Congress and President Trump have passed the largest tax reform legislation in over three decades. However, the bill, which will affect most taxpayers, will not affect taxes for 2017- it will be effective for taxes filed for 2018. For those wondering what the bill is all about, below is a summary of the major provisions in this new tax bill.
TAX RATE CHANGES
The bill did not alter the seven tax bracket provided for in the current law. However, it has lowered several tax rates. The income thresholds at which tax rates apply has also been changed.
In the current tax law, the brackets are 10, 15, 25, 28, 33, 35 and 39.6 percent. In the new law, the brackets will be 10, 12, 22, 24, 32, 35 and 37 percent.
Individual Rate Changes
There has also been a change in the income thresholds at which the tax rates apply;
For married joint filers
The current thresholds are up to: $18,650, $75,900, $153,100, $233,350, $416,700, $470,700, and greater than $470,700 respectively. The new thresholds will be up to: $19,050, $77,400, $165,000, $315,000, $400,000, $600,000, and greater than $600,000 respectively.
For those filling single;
The current threshold rose to $9,325, $37,950, $91,900, $191,650, $416,700, $418,400, and more than $418,400 respectively. The new threshold will rise to $9,525, $38,700, $82,500, $157,500, $200,000, $500,000 and more than $500,000 respectively.
| Single | Married Filing Joint | |||||||||
| Current Law | New Law | Current Law | New Law | |||||||
| 9,325 | 10.0% | 9,525 | 10.0% | 18,650 | 10.0% | 19,050 | 10.0% | |||
| 37,950 | 15.0% | 38,700 | 12.0% | 75,900 | 15.0% | 77,400 | 12.0% | |||
| 91,900 | 25.0% | 82,500 | 22.0% | 153,100 | 25.0% | 165,000 | 22.0% | |||
| 191,650 | 28.0% | 157,500 | 24.0% | 233,350 | 28.0% | 315,000 | 24.0% | |||
| 416,700 | 33.0% | 200,000 | 32.0% | 416,700 | 33.0% | 400,000 | 32.0% | |||
| 418,400 | 35.0% | 500,000 | 35.0% | 470,700 | 35.0% | 600,000 | 35.0% | |||
| > 418,400 | 39.6% | > 500,000 | 37.0% | > 470,700 | 39.6% | > 600,000 | 37.0% | |||
Increase in the Alternative Minimum Tax (AMT) Exemptions
The new bill reduces the individual burden of the alternative minimum tax (AMT) by increasing the income exempted to $109,400 from $84,500 (after adjustment for inflation) for married couples filing conjointly. For single taxpayers, it was raised to $70,300 from $54,300. The result of this action means that fewer taxpayers will be impacted and have to pay the Alternative Minimum Tax
Higher standard deduction
In this new tax bill, the standard deduction amount has nearly doubled with single taxpayer’s standard deduction jumping to $12,000 in 2018 from $6,350 for 2017 while married coupled who file jointly will see an increase to $24,000 up from $12,700. The increase in the standard deduction means that there will be fewer taxpayers clamoring to itemize since the standard deduction will eclipse those benefits for some. Currently about 30% of taxpayers file a return with itemized deductions such as medical expenses and state and local taxes.
Increased child tax credit
Families with children will see their Child Tax Credit doubled to $2,000 from $1,000. In addition, the refundable amount has increased from $1,100 to $1,400. In addition, the bill adds a new credit for dependents that are not children are for an extra $500 non-refundable credit. The income threshold at which the benefits listed above phase-out has also been raised to $400,000 from $110,000 for a married couple.
DEDUCTION REDUCTIONS
The new bill removes the personal and dependent exemptions available to taxpayers. The exemptions are were set at $4,050 for each taxpayer and dependent, and were expected to increase to $4,150 in 2018.
Home Mortgages and State and Local Taxes
The bill will limit the amount of local and state property, as well as deductible sales taxes to $10,000. In the current law, these taxes are fully deductible. The also bill caps mortgage indebtedness on new home purchases from which the interest can be deducted. The deduction was reduced from $1,000,000 to $750,000.
Health Care
The recently passed bill eliminates the individual mandate under the Affordable Care Act. It also reduces the floor above which out-of-pocket medical expenses can be deducted to 7.5% from 10%. This means taxpayers will be able to deduct medical expenses that are greater than 7.5% of your Adjusted Gross Income (AGI), making this attractive to taxpayers.
Small Business and Self Employed
The new tax law includes a variety of changes for business. The corporate tax rate has been reduced to 21%, and a new 20% deduction for certain types of pass-through entities like Partnerships, S Corps, and Sole Proprietorships. The law includes new limites on expensing interest from borrowing, and doubling the §179 business expense to $1,000,000.
