New Tax Legislation
What’s the current status of the tax overhaul bill?
The Republican-controlled House and Senate reconciled their separate versions of the new tax bill on December 15, 2017. The House and Senate must each approve the reconciled bill, which will then be sent to the President for signature. It appears very likely that the new tax bill will be signed into law before the end of the year.
THE NEW TAX LAW CHANGES WILL TAKE EFFECT AFTER 2017, AND WILL APPLY TO ACTIVITIES BEGINNING IN 2018.
What do the Tax Nerds think about it?
On the whole, while the tax overhaul legislation claims to provide tax savings to all income earners, the Treehouse Tax Nerds take the view that the wealthiest Americans and corporations will gain the most in tax savings, by far surpassing the relative benefits to lower- and middle-income taxpayers. None of the Tax Nerds is a believer in the disproven trickle-down economics theory being pushed by the Republican proponents of this legislation. However, we all must be prepared and informed about how the tax bill will impact our own personal and professional bottom lines. Despite our general political disapproval of this legislation, there are some beneficial provisions in the bill.
We will be updating this blog over the next several weeks as we study the new tax bill and the effects and implications for our clients. We want to know your concerns. Email us at: firstname.lastname@example.org if you have specific questions that you would like to see discussed here.
What's in the tax bill?
The following are a few highlights from the reconciled tax bill.
For a full copy of the Conference Committee’s legislative history report, see: http://docs.house.gov/billsthisweek/20171218/Joint%20Explanatory%20Statement.pdf
New tax rates and tax brackets – see below for more facts about the new rates with examples of the actual tax cuts at different income amounts
Repeal of the personal exemptions deduction (was $4,050 per taxpayer & dependent – a significant tax deduction for families with children)
Increased standard deduction:
Single $12,000 (up from $6,350), head of household $18,000 (up from $9,350), and married $24,000 (up from $12,700)
The benefit of the increased standard deduction is offset by the repeal of the personal exemptions deduction
Changes to itemized deductions (which may be claimed instead of the standard deduction using Schedule A):
New limitations on deductibility of state/local taxes: Cap of $10,000 for the combined total of state taxes paid (property taxes plus either income taxes or sales taxes)
New limitations on deductibility of home mortgage interest: New cap of $750,000 on total mortgage (down from $1 million) and no deduction for interest on home equity loans (previously deductible up to $100,000 of debt)
Medical expense threshold has been lowered from 10% to 7.5% of income which could result in an increased medical expense deduction
Repeal of all miscellaneous itemized deductions, including unreimbursed employee expenses (previously deductible if exceeded 2% of income)
Please note: In a future blog post, we will discuss in more detail the combined impact of the changes to the individual tax rates, tax brackets, personal exemptions deduction, standard deduction, and itemized deductions
Increased per-child Child Tax Credit of $2,000 (up from $1,000), which is fully refundable up to $1,400
Repeal of the ACA/Obamacare individual mandate
No changes to the deduction for student loan interest or the income exclusion for tuition waivers (both provisions had been proposed to be eliminated in earlier versions of the bill)
Businesses (Including Sole Proprietors)
New 20% tax deduction for business income earned as a sole proprietor (on Schedule C) or through pass-through entities such as S Corporations, LLCs, and partnerships
The type and amount of income eligible for this deduction is subject to requirements and limitations, which we will discuss in a future blog post
Corporate tax rate reduced from 35% to 21% (applies to C Corporations)
Increased flexibility to fully deduct the cost of certain business assets
Limitation on the amount of a net operating loss (NOL) carryforward that can be used each year to offset taxable income
Repeal of the deduction for domestic production activities, which provided a significant tax incentive to hire U.S. employees for manufacturing and production activities
What about the new individual income tax rates?
The tax bill would modify the current individual income tax rates, to be effective from 2018 through 2025. The new rates and marginal income brackets would result in a tax cut for most taxpayers. However, as shown below, the tax cut would primarily benefit higher earners.
The tax rates and marginal income brackets would be modified as follows:
How about some actual examples of the tax cut?
The actual impact of the new tax rates for a specific individual will depend on that person’s filing status (single, head of household, married filing jointly, etc.) and taxable income. For illustrative purposes, we calculated the income tax liability under the current and new rates at several different income levels for the three most common filing statuses:
Please check back here for more blog updates about the new tax legislation!