Congress Passes the Tax Cuts & Jobs Act

On December 20, Congress passed the Tax Cuts & Jobs Act, sending the final version of the tax reform bill to President Trump’s desk. The legislation changes the Internal Revenue Code to a degree unseen since the 1980s, altering income tax brackets, marginal tax rates, key deductions and exemptions, and the taxation of corporations and pass-through businesses. These are just some of the adjustments.¹ 

How many taxpayers could benefit from all this reform in 2018? Earlier this month, the financial website Business Insider ran some numbers to see how single, childless taxpayers earning $25,000, $75,000, and $175,000 a year would fare in the wake of the reforms. Business Insider projected 2018 tax savings of $369 for a childless taxpayer at the $25,000 level, $2,129 at the $75,000 level, and $5,240 at the $175,000 level. The calculations assumed these taxpayers would use the standard deduction in 2018, rather than itemize.²

Using the same three income levels, and again assuming use of the enlarged standard deduction, it also projected 2018 federal income tax savings for families of four with children no older than 16. With the Senate bill as the model, the projected 2018 tax savings were $100 for such a family at the $25,000 level, $2,244 at the $75,000 level, and $3,095 at the $175,000 level.³

Reirees are also poised to receive significant tax savings. The non-partisan Tax Policy Center projects an average tax savings of $1,000 for older Americans when they file their 2018 federal taxes in 2019. For seniors earning between $33,000-$56,000, the TPC forecasts a federal tax cut of around $300 (roughly 9%). Seniors earning less than $33,000 currently pay little or no federal income tax and would see little or no benefit from the changes.⁴

One interesting detail in the Tax Cuts & Jobs Act has merited little coverage. That is the application of the chained Consumer Price Index to the Internal Revenue Code – a move which affects inflation calculations. The chained CPI usually reflects less inflation than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-U), upon which Social Security cost-of-living adjustments are based. This raises the possibility of smaller Social Security COLAs in the future. At this point, Social Security COLAs are not dependent on the movement of the chained CPI.⁵

Households may want to make some moves before the new rules take effect. As marginal tax rates are reduced for 2018, some taxpayers might want to defer a little income into next year. The charitably minded may want to contribute more to qualified non-profit organizations in 2017 than in 2018, as the value of itemized deductions will be greater this year with a lower standard deduction. Lastly, those who like to itemize may be compelled to prepay 2018 property taxes before this year ends, given the $10,000 cap on the state and local taxes deduction in 2018.⁶

The Internal Revenue Service has quite a challenge on its hands. Web pages, forms, and publications need to be revised and the agency faces immediate pressure to issue new withholding tables. On December 17, the I.R.S. stated that worker paychecks would not reflect the impact of the Tax Cuts & Jobs Act until February – which means employees may have to make late-2018 withholding adjustments.⁷

Here is a summary of the major changes…

Individual Tax Rates:

The new law reduces tax rates across the board…

Individual Deductions and Exemptions:

• Nearly doubles the standard deduction (Single: now $12,000 from $6,500, Married now $24,000 from $13,000)
• Eliminates personal and dependent exemption (was $4,150 in 2017)
• State and local tax deductions have been capped at $10,000 for both single and married.  This includes real estate taxes, state income and sales taxes, and personal property taxes.
• The cap on mortgage interest has been lowered from $1.1M loans (which included $100k of home equity debt) to $750k.  HELOC interest used to acquire, build, or substantially improve the primary residence is still deductible, but proceeds used for other purposes will not be.
• Out-of-pocket medical expenses are now deductible once expenses exceed 7.5% of AGI, previously the deduction was only allowed after medical expenses exceeded 10% of AGI.
• The income phase-out on itemized deductions has been eliminated

Other Individual Changes:

• The child tax credit was doubled to $2,000 per child from $1,000, and the phase-out limitations were increased from $75,000 (single), $110,000 (married) to 200,000 (single), 400,000 (married).
• For individuals ATM (alternative minimum tax) exemptions have been increased to $70,300 from $55,400 (single) and $109,400 from $86,200 (married). 
• Federal estate tax exemptions have been increased to $11.2M (single), $22.4M (married).  The previous exemption was $5.6M (single), $11.2M (married)
• Business pass through income will be subject ordinary income rates less a deduction of up to 20%, thus the effective maximum rate is 29.6%.   A limitation applies on specified service businesses and a wage limit for those earning above the threshold of $157,500 (single) or $315,000 (married).  Previously pass through income was subject to ordinary income rates without a deduction.

Corporate Taxes:

• Top corporate tax rate was reduced from 35% to 21%
• Corporate alternative minimum tax was eliminated
• New investment purchases are now fully deductible in the year of purchase
• Business interest expense in excess of 30% of business income is no longer deductible
• Reduction of taxes on one-time repatriation of foreign earnings (8% rate)

If you have any questions regarding the new tax bill please feel free to contact us!  We are here to help you make better financial decisions.