The New Tax Bill
Congress has passed, and the President has signed, a major new Tax Bill revising many Tax Laws. It modifies much beginning January 1, 2018. There are a number of changes in the Tax Laws that you will want to pay attention to.
Tax Brackets Have Changed.
The rate that you are taxed at is a percentage that is based on your Adjusted Gross Income. (Whatever your net income is after deductions). The brackets have been lowered. For example if you were in a 25% Income Tax Bracket, you are more likely now to be in a 22% Income Tax Bracket. In other words, you are income taxed at a lower rate percentage wise than you were under the previous income tax bill. It looks on the average like you will be taxed at a 2% or 3% lower income tax rate.
The highest income tax rate previously under the law that runs through 2017 is 39.6%. Now the highest rate is 37%. Remember that there are different tax rates for single people versus a married couple filing jointly.
The Standard Deduction Has Gone Up.
The Standard Deduction is a set deduction that people take against their Gross Income to reduce the amount of their Adjusted Gross Income so that they will be taxed at a lower amount.
Under the new Tax Bill the standard deduction for an individual has moved up to $12,000 from the $6,350 standard deduction amount. For married couples, it has moved up to $24,000 from the $12,700 deduction. About 70% of the tax payers claim the standard deduction, so this will be a big benefit to most people.
If you itemize your deductions above the $12,000 for an individual or $24,000 for a married couple, you will still be able to continue to itemize your deductions.
There Are No Changes in Capital Gains and Dividends Expenses.
Capital Gains and qualified Dividends will continue to be taxed at the current rates of 0%, 15% or 20%, depending on your income.
There was some concern that the Capital Gains Tax would be eliminated, but that the “Step Up in Basis” would be eliminated, which would be a much more difficult burden on people who inherit assets.
There is still an 3.8% tax on investment income for wealthier tax return filers. This was a tax that was inside the Obamacare Bill. This remains in place. (This was how the US Supreme Court upheld the Obamacare Healthcare Bill, stating that Congress had the ability to create new taxes).
Pay Attention to Eliminated or Reduced Deductions.
Some itemized deductions are reduced or eliminated. These include:
- State income taxes, property taxes, and sales taxes combined will be limited to a $10,000 deduction. (Your North Carolina Income Tax, plus Property and State Sales Taxes are limited to a $10,000 deduction). This will have a big impact if you have a high property tax bill or high state income tax bill. You will want to pay attention to this because this is one of the main deduction losses that may “pop” people.
- Mortgage Interest Deductions will be limited to a $750,000 mortgage on your residence. If your mortgage is above that amount you will not be able to deduct the amount above the $750,000 mortgage payments that you are making on the residence. (You can continue to deduct more than one residence. Some people have several homes). The former cap was a $1,000,000 mortgage limit. The deduction does apply to second homes, but not for Home Equity Lines of Credit.
The Estate Tax Exemption Has Doubled.
Currently you can pass $5.49 million dollars (approximately $5.5 million dollars) Estate Tax free as an individual. Married couples can double that number with proper Estate Planning.
There is a new $10 million dollar Estate Tax Exemption base that is good for the years 2018 through 2025. The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from Estate Taxes. The Federal Estate Law provisions combining married couples exemptions, and also through “Portability”, allows a married couple who do proper Estate Planning to double that exemption, so as to exclude $22.4 million in assets from Estate Taxes.
Estate Tax is a tax that is placed on assets that move from one generation to the next after someone passes on. Currently North Carolina does not have an Estate or Inheritance Tax. There has been one in the past and the current governor would like to see one again, but currently there is not one. We will watch for changes on this front.
Remember this Estate Tax Exemption can be used for gifting. (Moving assets to your loved ones now). Some people want to do “Gifting” now while the law is in place and certain. Remember sooner or later the other Political Party is in control and the Tax Code is definitely one of the things that is used to advance political agendas.
Business Taxes.
- The corporate tax rate will be reduced to 21% as opposed to the 35% at its highest rate.
- Limited liability companies, S corporations, and sole proprietorships, in limited circumstances, are given a 20% deduction. This sounds like a great benefit to small businesses, but it doesn’t apply very often. Accountants, doctors, lawyers and a number of other service people do not get this added deduction.
(Great news we are giving you a new deduction to encourage your small business in America! – Bad news! It doesn’t apply to you).
Child Tax Credit.
The Child Tax Credit went to $2,000 dollars up from $1,000.
529 and College Accounts.
The amount that you can put into a 529 (a State sponsored non-taxed college investment account) or other similar college savings plans, has been increased so that you can put up to $10,000 dollars per year. This is helpful if you are a grandparent helping fund college for grandchildren or a parent setting aside education money ahead for their children.
Retirement Accounts Remain the Same.
Qualitied Retirement Accounts that people have remain the same in their deductibility. This is good news for the people who are investing now so that they will have money for expenses when they are unable to work, or are fortunate enough to have invested long enough so that they do not have to work.
The Alternative Minimum Tax.
The Alternative Minimum Tax remains in effect for individuals. There are tax breaks on it but it still applies. It is a difficult and confusing area and you will want to get the assistance of your CPA, Accountant or Tax Professional to help you and in some of the more convoluted areas of the New Tax Rules.
Medical Expenses.
The new Tax Bill preserves the deduction for medical expenses and temporarily reduces the limitation from 10% to 7.5% of the Adjusted Gross Income for tax year 2018. Beginning in 2019 only medical expenses that exceed 10% of the Adjusted Gross Income will be deductible.
Charitable Donations.
The new Tax Bill preserves all major charitable donations deductions, with the exception of a few specific donations. (Such as the deduction for payments made in exchange for college athletic seats).
The Personal Exemption and Dependent Deduction Elimination.
The new Tax Bill eliminates the $4,050 dollar personal exemption and Dependent deductions. When combined with the increased Standard Deduction and increased Child Tax Credits, lower and middle class income houses should see a net benefit despite the elimination of these deductions. Higher income classes could see an increase in the new Tax Bill if they have large families that do not qualify for the Child Tax Credit because their income.
The Treatment and Calculation of Cost Bases on Investment Sales.
The Tax Bill remains unchanged on a provision that requires investors to use the “First End – First Out” method to calculate cost bases on investment sales. (Investors were afraid that this provision would not be included).
These Tax Laws Sunset.
These Taxes “Sunset” or “End” in 2025. This is due to the “Byrd Rule” that says any permanent tax bill must be passed by 60% of the Senate. Rarely does either political party have 60% of the votes of the Senate nowadays.
Summary
These new Tax Rules were passed on December 20, 2017. We are unsure how they are going to be implemented. For example people with very high property taxes on their very large residences, including in California, New York and Connecticut are attempting to prepay property taxes for 2018 in this year of 2017. The IRS has said they may not allow that to be deducted in 2017. (In 2017 there is no cap on the amount that you can deduct for your property taxes, state income taxes and state sales taxes).
We will continue to watch as these New Tax Rules are implemented by the IRS. We will also watch for innovative ways in which Tax Professionals try to lower and or limit exposure under the New Tax Rules.
At the Law Firm of Steven Andrew Jackson, Attorney and Counsellor at Law, we have helped hundreds of families protect themselves and their loved ones, avoid Estate Taxes and Probate Costs, and keep their Estate Plans current with the law through The Customized Protective Estate Planning Solution™.