Do you benefit from Tax Cuts and Jobs Act?
A Guide To The Benefits Realized By TCJA
The final terms of the tax bill have now been signed into law. The majority of the tax provisions will take effect as of January 1, 2018 and many workers will see the effect on their paychecks starting as early as February. While there has been endless debate on whether this will be beneficial to most US taxpayers, it is important to look at the actual provisions of the bill to make that determination. While we do not recommend reading the entire 560 pages of the bill unless you have severe insomnia, the following is a recap of the major provisions of the Tax Cuts and Jobs Act. It is important to note that most of these changes will expire at the end of 2025, unless they are extended by Congress. Nevertheless, analysis has seemed to show that the Tax Act will provide a measure of benefit to most taxpayers during the period.
Alternative Minimum Tax (AMT) exemption threshold has increased to $109,400 for married and $70,300 for all other taxpayers. The phaseout thresholds are increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts will be indexed for inflation.
Capital Gains Calculation methodology has not changed. However, the income levels at which the 15% and 20% rates were changed.
|0%||up to $38,600||up to $77,200|
|15%||$38,600 – $425,800||$77,200 – $479,000|
|20%||above $425,000||above $479,000|
Casualty Losses will be deductible only if the loss is attributable to a presidentially declared disaster.
Charitable Contributions – The income-based percentage limit for charitable contributions of cash to public charities was increased to 60%. The bill also eliminates a charitable deduction for payments made for college athletic event seating rights.
Child Tax Credit was increased to $2,000 per qualifying child. The maximum refundable amount of the credit is $1,400. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.
Estate and Gift Tax Exemption will double to $11.2 million for estates and gifts made after December 31, 2017 and before January 1, 2026. The basic exclusion amount increased from $5 million to $10 million.
Home Equity Loan deduction was repealed through 2025.
Education Related Deductions were kept intact. Additionally, tax-exempt 529 college savings plans can be used to pay up to $10,000 for private school tuition. Families that send or plan to send their children to a private school can start benefiting immediately by contributing to a 529 plan.
Insurance Purchase Mandate Penalty for those that do not obtain health insurance was reduced to zero.
Individual Tax Brackets
|10%||up to $9,525||up to $19,050|
|12%||$9,525 – $38,700||$19,050 – $77,400|
|22%||$38,700 – $82,500||$77,400 – $165,000|
|24%||$82,500 – $157,500||$165,000 – $315,000|
|32%||$157,500 – $200,000||$315,000 – $400,000|
|35%||$200,000 – $500,000||$400,000 – $600,000|
|37%||$500,000 and above||$600,000 and above|
Miscellaneous Itemized Deductions subject to the 2% floor under current law are repealed through 2025.
Mortgage Interest Deduction will be limited to interest on a $750,000 loan value on newly purchased homes. Those who currently have a loan or binding written contract before December 15, 2017 will be grandfathered and allowed to use the previous $1 million limit.
Pass Through Income will be allowed to be deducted for 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. There are specific restrictions on what will be classified as a qualified business eligible for the deduction. The restrictions were put in place to prevent business owners from reclassifying their W2 wages into 100% pass-through income to take advantage of the 20% deduction. They also wanted to restrict employees from leaving their company as a W2 employee, starting a sole proprietorship, and entering a sub-contractor relationship with their old employer just to reclassify their W2 wages into 100% pass-through income.
Standard Deduction will increase from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. The personal exemption has been eliminated through 2025.
State and Local Taxes will have a $10,000 limit on the combined state and local income and property taxes. This will have a negative effect on taxpayers in high-tax states such as California and New York, but will have a much smaller effect on residents of Texas.
These only reflect the changes that will affect individual taxpayers. The other significant changes in the bill that apply to corporate taxation were the changes in the corporate tax rate from 35 percent to 21 percent while taxing foreign earnings at lower rates of 15.5 percent on liquid assets and 8 percent on illiquid assets. The bill also eliminates the corporate alternative minimum tax, which currently limits the amount of deductions a corporation can take.
While the corporate tax changes do not affect individuals directly, the potential effect on economic growth in terms of job creation, infrastructure and capital expenditures may prove to be the bigger benefit overall.
As always, if you have any questions, please reach out to our office.
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Please note: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.