In December 2017, Congress passed far-reaching tax legislation, which takes effect in 2018. The tax bill features many changes that may affect individuals and businesses, and it’s important to understand what is changing and how it may affect you.
As with any tax-related topic, this is meant to give you an overview of the changes, but your individual situation will determine how much you will be impacted. You should seek guidance from your tax professional on your specific situation.
Individuals & Families
The new tax bill is a mixed bag for individuals and families. While income tax rates have come down slightly and the standard deduction has been increased, the bill eliminates many itemized deductions. Whether you’ll benefit from the changes in the tax bill is dependent on a variety of factors, including how you typically handle deductions, what specific deductions you usually take, and other income details.
Deductions, income tax rates, and personal exemptions
- The standard deduction has been increased for single taxpayers from $6,350 to $12,000 and for married taxpayers from $12,700 to $24,000. This change will likely result in fewer taxpayers itemizing deductions.
- Reductions in individual income tax rates and adjustments to income levels, which expire in 2025:
|Tax Rate||Joint Return Income||Individual Income|
|10%||$19,050 or less||$9,525 or less|
|12%||Over $19,050||Over $9,525|
|22%||Over $77,400||Over $38,700|
|24%||Over $165,000||Over $82,500|
|32%||Over $315,000||Over $157,500|
|35%||Over $400,000||Over $200,000|
|37%||Over $600,000||Over $500,000|
- Charitable contributions can be deducted up to 60% of a taxpayer’s AGI
- Elimination of the personal exemption, which was previously available for each family member
- Elimination of deductions for personal casualty and theft loss
- Elimination of miscellaneous deductions subject to the 2% floor (certain investment expenses, professional fees & unreimbursed employee expenses)
- Elimination of AGI-based reduction of certain itemized deductions
- An increase in AMT exemptions to $109,400 for joint filers, $54,700 for separate filers, and $70,300 for individuals and heads of households
Children and dependents
- The Child Tax Credit has been doubled to $2000 per qualifying child and a new child tax credit of $500 has been added for dependent children who don’t qualify for the Child Tax Credit
- Expands 529 plans to include tax free distributions of up to $10,000 per year for K-12 expenses
- The deduction for state and local taxes is now limited to $10,000
- To deduct mortgage interest, mortgage amounts for new purchases must be less than $750,000 or less if filing jointly or $375,000 or less if filing as an individual
- Elimination of moving expenses (except for members of the military in specific circumstances)
- The AGI threshold for medical expense deduction has been reduced to 7.5% for regular and AMI purposes, just for 2017 and 2018
- The gift and estate tax exemptions have doubled to $10 million for 2017 and $11.2 million for 2018
Savings, Investments, and Retirement Plans
- Keeps ability of fund investors to identify shares of a security to be sold in order to manage the timing of capital gains and losses
- Preserves exemption of interest paid on private activity bonds
- Keeps tax deferrals for 401K and IRA plans, giving investors ability to put money into those plans before taxes are due
- Contribution thresholds were increased slightly to 18,500 in 401(k)/403(b)’s. The IRA contribution limits remain unchanged at 5,500 as do the over 50 catch-up contributions of 6,000 and 1,000 for 401(k)’s and IRAs respectively.
- Investors may no longer be able to recharacterize a conversion to a Roth individual account after the 2017 tax year; it’s unclear what the IRS’ specific guidelines on this will be
The new tax bill is largely favorable for businesses because it greatly reduces the income tax rate on corporations and gets rid of the corporate AMT. At the same time, it no longer lets businesses take advantage of as many tax breaks. Whether your business will see positive benefits from the tax bill is dependent on a variety of factors, including how ownership of your business is set up, how you’ve handled deductions and expenses up until this point, and other business income details.
- Graduated corporate tax rates have been replaced with a flat rate of 21%
- Repeal of corporate AMT
- Through 2025, owners of pass-through entities, such as LLCs, partnerships, and S corporations, may qualify for a 20% business income deduction
- For assets acquired and used between 9/27/2017 and 1/1/2023, businesses can double the bonus depreciation to 100% and expand qualified assets to include used assets
- The Section 179 expensing limit is increased to $1 million, and the expensing phaseout threshold is now $2.5 million
- Businesses can no longer deduct net interest expense that exceeds 30% of the business’ adjustable tax income
- New tax credit for family and medical leave paid for by employer, which only applies through 2019
- New limitations on deductions for employee benefits, including entertainment, meals and transportation