Perhaps the most important aspect of the tax bill is the reduction of the corporate tax rate from 35% to 21%. This is important because it can make the U.S. more competitive globally. The business version of the alternative minimum tax (AMT) has also been repealed. In simple terms, lowering the corporate tax rate may improve the earnings outlook of U.S. businesses (large and small) beginning in 2018, which should be a positive for U.S. stocks. In addition, U.S. businesses that are holding assets overseas will be allowed to "repatriate" those assets at an 8% tax rate, or 15.5% for liquid assets.
The number of tax brackets will remain the same with seven brackets beginning in 2018. However, most income ranges will benefit from lower rates. The top individual rate drops from 39.6% to 37%.
2018 proposed tax brackets are shown in the footnotes.
Exemptions, Standard Deduction, and Child Tax Credits
It’s likely that fewer tax payers will itemize deductions because the standard deduction is going to nearly double under the new plan. From $6,350 for individuals to $12,000, and from $12,700 for joint filers to $24,000. While the personal and dependent exemption is being repealed, families will benefit from additional child tax credits. The tax credit for each child (16 years old or younger) will increase from $1,000 to $2,000, plus $500 for non-child dependents. The phaseout for whom these apply is also increasing, reaching $400,000 for joint filers (up significantly from $110,000 in 2017).
Alternative Minimum Tax (AMT)
Under the new plan, fewer filers should face the AMT. The bill raises the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
State, Local, and Real Estate Taxes
There will now be a $10,000 cap on the amount taxpayers can deduct for property, income and sales taxes paid from their federal returns. This will be a negative for residents in higher-tax states. One potential strategy would be prepaying real estate taxes by December 31, 2017 in order to get the deduction this year as it may be limited next year. Consult with your tax professional to determine if this would benefit you.
Mortgage Interest Deduction
There was much talk about this deduction going away, but it is still intact. In 2017, interest on mortgages up to $1.1 million were able to deduct interest paid, however, the new threshold will be lowered to $750,000 in debt moving forward.
Education Credits and 529 Plans
It is worth noting that under the new bill, distributions from a 529 Education Account can now be used for private elementary and secondary school expenses (up to $10,000 per student per year). The American Opportunity Tax Credit, the Lifetime Learning Credit, and the student loan interest deduction remain in place.
Also once considered to be repealed in total, the estate tax remains, however, the exemption has been doubled—now $11.2 million per individual and $22.4 million for married couples. These amounts will be indexed for inflation as well. This means if the assets in your estate fall below those levels, you will not be subject to paying taxes on the estate. It is also worth noting that the “step-up” in basis rule will also remain in place. Please note that these exemption amounts are scheduled to “sunset” in 2025.
Tax filers who have business income taxed on their individual tax return (“pass-through income”) may benefit from the new law. S-Corporations, LLCs, sole proprietorships, and partnerships may benefit from a tax deduction with the top rate decreasing from 39.6% to 29.6%.
The bill eliminates the mandate that requires individuals to purchase health insurance put in place by the Affordable Care Act (aka Obamacare). Under the new plan, there will no longer be a penalty for not buying health insurance starting in 2019.
Tax reform will likely remain a key economic issue in the first part of 2018. We will provide our thoughts on any changes that may be announced, and we invite you to contact our team of Wealth Planners to have a more in depth discussion about these historic changes.
Fort Washington does not provide tax advice nor is an expert in tax law.