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Highlights of the New Tax Law

Congress has passed the Tax Cuts and Jobs Act and, as promised, President Trump signed it into law on December 22, 2017.  Here are some highlights of the new law which takes effect January 1, 2018.

Individual Tax Rates and Brackets.  The new law retains seven tax brackets, but six are at lower rates than under the current law. The new tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, whereas the current tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.  There is no change under the new law on taxation of long-term capital gains and dividends.

Higher Standard Deduction, But No Personal Exemptions.  The new law almost doubles the standard deduction amounts in 2018 to $12,000 for single individuals ($6,350 in 2017) and doubles it to $24,000 for married couples filing jointly ($12,000 in 2017), but the personal exemptions (which would have been $4,150 for 2018) are eliminated. 

Limits on State and Local Tax Deductions.  Under the current law you can claim an itemized deduction for an unlimited amount of personal state and local income and property taxes.  Under the new law, the deduction for state and local income and property taxes is limited to a combined total of $10,000 per family ($5,000 for married filing separately), and there is no deduction allowed for foreign real property taxes.

Home Mortgage Interest Deduction Reduced.  The new law reduces the maximum amount of mortgage loans to acquire a first or second residence for which you can claim an itemized interest expense deduction from $1 million ($500,000 if married filing separately) to $750,000 ($375,000 if married filing separately).  This change does not, however, affect home purchase mortgages taken out under contracts in effect before December 16, 2017, as long as the home purchase transaction closes by April 1, 2018.

Expansion of Medical Expense Deduction.  The new law expands the itemized deduction for medical expenses to cover medical expenses in excess of 7.5% of adjusted gross income (AGI) for 2017 and 2018.  The prior law only allowed a deduction of medical expenses in excess of 10% of AGI for those born after 1952. 

Obamacare Tax Repealed.  The new law repeals the Obamacare tax on those without health insurance in 2019.

Alternative Minimum Tax Impact Reduced.  Although the new law retains the AMT, the law significantly increases the AMT exemption (from $54,300 to $70,300 for single filers and from $84,500 to $109,400 for joint filers) and phases out the AMT at a much higher income level ($500,000 for single filers and $1 million for joint filers) than under the current law.  With the new limits in deductions for state and local taxes, the elimination of personal and dependent exemption deductions, and larger AMT exemptions, many taxpayers will find that they are no longer subject to the AMT under the new tax law.

Estate Tax Exemption Doubled.  Although there was an attempt to completely repeal the federal estate tax which applies to the transfer of assets at an individual’s death, the new law retains the estate tax.  However, the exemption (the amount that can pass free of federal estate tax at a person’s death) is doubled.  The current exemption allows each individual who passes away in 2017 to transfer assets of up to $5.49 million free of federal estate tax ($10.98 million per couple).  The exemption for individuals who pass away in 2018 will be $11.2 million ($22.4 million per couple).  This exemption amount is indexed for inflation. 

Tax on Businesses Reduced.  The new law lowers the maximum corporate tax rate from 35% to 21%.  Certain pass-through businesses such as LLCs, partnerships, and S corporations, will also see tax reductions under the new tax laws.  They will be able to deduct 20% of their qualified business income and effectively pay income taxes on only 80% of their revenue. 

The corporate tax rate changes are permanent under the new law, while most of the individual changes expire at the end of 2025.  In many ways, the Tax Cuts and Jobs Act of 2017 radically changes our tax environment, at least for the next several years. It will certainly be to your benefit to stay abreast of new tax-minimization strategies that emerge in the coming months. 

M. Beth Burger