After a few months of discussion and revisions, last month Congress passed and President Trump signed the Tax Cut and Jobs Act of 2017. This is the 2nd largest tax cut package in United States history behind only the 1981 tax reform law during Ronald Regan’s presidency. The items of this new tax cut law begin with the 2018 tax year and provide for individual and corporate tax reform. The following are some highlights of the new tax reform law:
1. This new tax law keeps seven individual tax brackets. Five of the seven brackets have lower tax rates applied to them. Therefore instead of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, the individual tax rates under the new law are 10%, 12%, 22%, 24%, 32%, 35%, and 37%;
2. The corporate tax rate has been reduced from 35% to 21%. The original plan was to reduce the rate to 20% but after much calculation and debate, it was reduced to 21%. This is the highlight of the new law and the goal is that by reducing the corporate tax rate, this will raise the profits for corporations and those increased profits will either be passed on to employees, create new jobs, or allow corporations to grow and expand their operations;
3. The current individual standard deduction is $6350 and the personal exemption amount is $4,050 for a total of $10,400. Thus these amounts reduce the amount of income that is taxed and thus reduce the income tax that is paid. Under the new tax law, the personal exemption is eliminated and the standard deduction is increased to $12,000. Thus this increase provides a $1600 increase and benefit to individual taxpayers. For a married couple the standard deduction moves increases to $24,000;
4. Limits have been placed on the amount of real estate taxes and state and local income taxes that can be used as itemized deductions. Under current law there is no limit on these two itemized deductions, however these items are phased out at certain income amounts. Under the new tax law, the maximum amount that can be deducted is now $10,000 per year combined for real estate taxes and state and local income taxes;
5. The alternative minimum tax is an additional income tax that affects a number of taxpayers who have certain exemptions. The original plan was for the alternative minimum tax for corporations and individuals to be eliminated. However, the new law keeps the alternative minimum tax but does increase the exemption amount. Thus fewer taxpayers should be affected by this additional tax.;
6. The top income tax rate for certain flow-through entities, such as limited liability companies and S corporations, has been reduced from 39.6% to 29.6%. Once again the plan is that by reducing this rate, business owners will be more likely to pass this savings on to their employees or to expand their business. These items would increase spending and help the economy;
7. The federal estate tax is a tax on an individual’s estate when he or she passes. The current exemption amount is $5,490,000 and the tax rate is 40%. Under the original plan, the federal estate tax would be repealed. However, under the new law, the estate tax remains but the exemption amount increases to $11,200,000 per person. This amount is indexed for inflation and will be in effect from 2018 through 2025. The estate tax is currently 40% on any assets an individual passes away with over and above $5,490,000.
A number of planning matters should be considered for individuals and corporations as a result of these changes in the tax law. Taxpayers should contact their CPAs to determine the effect that this new tax law will have on their individual and business situations, analyze the options and plan accordingly.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.