Jan 26, 2018

The Impact of Tax Reform for Individual Taxpayers

By Heather Kelly

This article is the first in a 3-part series concerning the implications and consequences of the Tax Reform Act recently passed by Congress. Part I will focus on individual taxpayers; Part II will focus on businesses; and Part III will focus on the planning considerations for high net worth individuals.

Congress recently passed the largest piece of tax reform legislation in more than 30 years. The bill is likely to affect most people in one way or another in terms of their tax obligations, though to what extent depends on their personal and business circumstances.

Though the new tax law changes are broad and far-reaching, I would like to point out that many of the current changes are set to expire in December 31, 2025. It is important to keep this in mind because in all likelihood, these are temporary revisions to the tax code, and no doubt there will be additional changes in the future. Therefore, it makes sense to take into account all the new tax changes but not to have one’s long-term planning efforts be solely based on where the tax laws stand today.

Of course, most people are interested in knowing what’s new in the bill and how the changes will specifically affect them. As mentioned above, this article will detail some of the major tax provisions as it pertains to individual taxpayers.

Tax Rate and Bracket Changes

Under the previous tax law, there were seven tax brackets, starting at 10 percent and reaching 39.6 percent for incomes above $418,400 for singles and $470,700 for joint filers.

Under the new tax law, there are seven brackets, starting at 10 percent, but the highest tax rate is now 37 percent for incomes above $500,000 and $600,000 for married filing joint.

According to the Tax Policy Center, almost everyone, on average, will save some money from the tax rate changes. However, some taxpayers will receive higher tax cuts (as a percentage) than others. Let’s take a brief look at the effects on taxpayers from different income levels:

Low-Income Households – The Tax Policy Center estimates that almost half of low-income households will not see any changes at all in their tax liability. It further estimates that the lowest income earners would receive an average tax cut of less than 0.5%, while those taxpayers in the next bracket up will get an average tax cut of just over 1%.

Middle-Income Households – According to the Tax Policy Center, about 90% of all middle-income households will have a lower tax bill, while 7% will have a higher one. On average, middle income families will receive a tax reduction of 1.0 - 1.5 % and save about $900 in taxes in 2018.

High-Income Households – The top 95%–99% are the biggest winners with an average tax cut of about 4%, with the largest share of benefits going to households earning $308,000 to $733,000. The top 1% will see an average tax cut of about 3.5%, while the top 0.1% will receive an average tax cut of a little more than 2.5%.

Marriage Penalty Eliminated

Under the previous tax laws, some couples found themselves in a higher tax bracket after marriage, thus being effectively penalized for being married. The new income brackets that apply to each marginal tax rate for married couples filing jointly are now exactly double those for singles, so there is no longer any “marriage penalty”.

Standard Deduction Increased

Under the previous tax law, approximately 30% of taxpayers chose to itemize their deductions on their tax returns. The new tax law nearly doubles the amount of the standard reduction and as a result, the number of taxpayers who itemize is expected to decrease dramatically.

The standard deduction for single taxpayers increases from $6,350 for 2017 taxes to $12,000 for 2018 taxes. Married couples filing jointly will see an increase from $12,700 to $24,000.

Alternative Minimum Tax Exemptions Increased

The Alternative Minimum Tax (AMT) was created to prevent high-income taxpayers from avoiding the individual income tax. However, increasingly, middle-income taxpayers were also being subjected to the AMT’s higher tax rates. To prevent low- and middle-income taxpayers from being subject to the AMT, the new tax bill raises the income exempted from $54,300 to $70,300 for single taxpayers, and from $84,500 to $109,400 for married couples filing jointly.

Child Tax Credit Increased

The new tax reform act doubles the amount of the Child Tax Credit from $1,000 to $2,000 per qualifying child. In other words, if you have one child, you'll be able to claim a $2,000 credit. For two children, your credit is $4,000, etc.

The bill also adds a new, $500 credit for other dependents who do not qualify for the child tax credit. It raises the income threshold at which these benefits phase out – from $110,000 to $400,000 for a married filing jointly and $200,000 for all others.

Deductions Eliminated or Reduced

State and Local Taxes – Under the previous tax law, taxpayers who itemize could fully deduct the amount they paid in state and local taxes—such as property taxes and income taxes—from their federal tax return. This ensured their income was not taxed twice, once at the state level and again at the federal level. However, the new tax law eliminates all SALT deductions, with the exception of a state and local property tax deduction, which is capped at $10,000.

Home Mortgage Deduction – Previously, homeowners could deduct interest on their home mortgage loans up to $1 million in property value. The new tax law caps the amount of mortgage indebtedness on new home purchases on which interest can be deducted at $750,000. There is a grandfathering rule for properties acquired prior to 2018 and for homes under contract prior to December 15, 2017.

Other Itemized Deductions – The new tax law eliminates some previously itemized deductions, such as professional fees such as tax preparation, investment advisory and some trustee fees, unreimbursed employee expenses and employer subsidized commuter reimbursesments, moving expense (except active members of Armed Forces), casualty losses for non-federally declared disasters, and other miscellaneous deductions subject to the 2% AGI limit.

It is important to be aware that the new tax bill is over 500 pages long and obviously, we have only touched upon a few of the major changes in the bill. Also, as always, we recommend that you consult with a professional tax consultant or your financial advisor to determine exactly how these new tax changes pertain to your individual situation.

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