Written by: Ryan Bouchey
Today members of the House Ways & Means Committee passed their version of the tax bill which is the latest step to getting the much anticipated tax reform President Trump has promised. Let’s dig in to some of the details to see how it may affect you.
Top tax rate remains unchanged
Folks on the left kept telling us this was a tax cut to the rich, however the top tax rate of 39.6% remains unchanged. Now this tax bracket starts at a higher amount for individuals ($500,000) and married couples ($1,000,000), but it remains intact. The bill also moves us from sever overall tax brackets to four, hopefully to simplify the overall tax code for individuals.
Higher standard deduction, repeal of personal exemptions
This could be a positive for individuals and families who do not itemize their deductions as the overall deduction will increase. The standard deduction is going from $12,700 to $24,000 for a married couple in 2018, however they are repealing the ability to take personal exemptions (currently $4,050 ). The size of one’s family has an important impact here due to the removal of the personal exemptions, however the child tax credit is increasing to $1,600, as well as an additional family flexible credit of $300 which can be used for non-child dependents and the tax payers themselves. In most cases, this should be a benefit to the tax filer.
Higher Child Care Credit
The child-tax credit was an area being talked about since President Trump was on the campaign trail. The new GOP bill expands the child-tax credit from $1,000 to $1,600, as well as creating an additional $300 for non-children dependents (in addition to the taxpayers). Not only that, but the phase-out limit is increasing so that more middle-income families will qualify. This will be looked upon as a win for most families with qualifying children.
Repeal or limitations of current itemized deductions
For those taxpayers who itemize their deductions, many changes will be in effect for 2018 should this bill go through that could potentially hurt taxpayers. One major change is the mortgage interest deduction being limited to $500,000 of borrowing on a primary or second home (the current law allows for up to $1,000,000). Medical expense deduction looks to be phased out as well, which one could take as a deduction if they exceeded 10% of AGI. The big deduction removal, especially for New York residents, is the loss of a deduction for state and local income tax. It also looks to cap deduction for property taxes at $10,000. This especially hurts those residents in high state tax rates with higher real estate values, which includes New York. I’m not saying this was political in nature, but these deductions that are no longer available hurts a number of predominately “blue” states such as New York, California, Massachusetts and New Jersey.
Business owners and corporate tax rates
For business owners who count their income as pass-through income, this income was taxed at your ordinary income tax rate for an individual or family. For those that qualify for pass-through income, the rate will be capped at 25% rather than 39.6% for those high-income earners. The corporate tax rate also looks to go from 35% to 20%. Both changes could help move this slow growth recovery where we averaged 2% growth to a more robust 3% growth if it helps spur additional job creation and increased business investment.
What to do from here
We finally have the details of the GOP tax plan we’ve heard all about this past year. Although it’s not yet the law, it still gives a lot of insight into the changes we may see for 2018. It would be a good idea to sit down with an accountant and financial planner to see if there are moves you can make from now until the end of the year that could benefit you heading into the new year should these changes be put into place for 2018. Depending on your unique circumstances, this law could be good or bad for you moving forward. What is clear though is that it’s not just a law to help the rich, in fact it may hurt some higher income families, especially those with itemized deductions in some high income states. It most certainly will help the middle class, but it will be different for each taxpayer depending on their situation. It’s never too early for tax planning so don’t hesitate to speak with an advisor sooner than later!