Congress recently passed the Tax Cuts and Jobs Act changing the tax code beginning 2018. This new tax law made significant changes to the corporate rate, dropping the rate from 35% to 21% and also dropped the individual tax rate to 37%. There are also other significant changes that will affect you.
REDUCTION OF FEDERAL INCOME TAX BRACKETS
The change in the seven tax brackets will be as follows: 10%, 12%, 22%, 24%, 32%, 35%, with the top individual rate dropping from 39.6% to 37%. These top rates, while significantly lower, are set to expire in 2025.
CHANGES TO STANDARD DEDUCTION AND PERSONAL EXEMPTIONS
The new law doubles the standard deduction. Single filers deduction nearly doubles from $6,350 to $12,000. Those who are married and filing jointly will see an increase from the previous $12,700 deduction to $24,000. However, the law eliminates personal exemptions. This will be a large change for filers who are used to subtracting $4,150 for each person claimed on their taxes. This may push many to take the standard deduction instead of itemizing their taxes.
ELIMINATION AND LIMITS ON ITEMIZED DEDUCTIONS
Some itemized deductions are eliminated, including deductions for unreimbursed employee expenses, employee moving expenses, and the deduction for alimony payments. There is also a limit on on SALT. Tax payers will be capped at $10,000 in deductions for state and local taxes. Mortgage interest can be deducted on the first $750,000 of the loan. However, there will not be any changes or elimination to charitable contributions, student loan interest and retirement savings deductions.
EXPANDED CHILD CREDIT
The child credit is increased from $1,000 to $2,000. This credit is refundable, meaning even if you do not owe taxes but have dependent children, up to $1,400 will be refunded if you meet the income requirements.
BOOST FOR BUSINESSES
Not only does the law lower the tax rate 14% for corporations, it also raises the deduction to 20% for pass through business income. This includes S corps, sole proprietorships and, LLC’s, and partnerships. While the corporation tax cut is permanent, the change in tax for small business is also set to expire in 2025.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.