Have you read and reviewed the new tax plan with your clients? Most taxpayers are wondering about the tax changes and how it’s going to affect them. Your high-net-worth clients are going to have a few special questions for you. It is important to note that this bill will not affect 2017 taxes.
While the final bill still leans heavily toward tax cuts for corporations and business owners, it will also expand or restore some of the tax benefits for individuals relative to the earlier bills passed by the House and Senate. Individual provisions are set to expire by the end of 2025, but most of the corporate provisions will be permanent.
You can read the whole bill here for yourself, but here is our quick breakdown of the 16 key provisions in the bill.
Individual Filers
1. Lower individual rates for most, but not all
The bill keeps seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Here’s how much income would apply to the new rates:
— 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
— 37% (over $500,000; over $600,000 for couples)
2. Almost doubles the standard deduction
Single filers will find that the bill increases to $12,000 from the current $6,350. Married Couples filing jointly will see an increase from $12,700 to $24,000.
3. Eliminates personal exemptions
Currently, you’re allowed to claim up to a $4,050 personal exemption for yourself, your spouse and each of your dependents thus lowering your taxable income. The GOP tax plan eliminates that option.
4.Caps state and local tax deduction
The new tax plan will keep the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes.
The current SALT break has been in effect for over a century. According to the Tax Foundation, residents in the majority of counties across the country claim an average SALT deduction below $10,000. For low and middle-income families who currently itemize because of their SALT deduction, they’re likely to take the much higher standard deduction under the bill if it becomes law, unless their total itemized deductions, including SALT, top $12,000 if single or $24,000 if married filing jointly.
Preserving the break is likely to provide more help to higher income households in high-tax states.
5. Expands child tax credit
The credit will to $2,000 for children under 17. It also will also be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.
Like the first $1,000 of the child tax credit, $400 of the additional $1,000 also will be refundable, meaning a low- or middle-income family will be able to get the money refunded to them if their federal income tax liability nets out at zero.
6. Creates temporary credit for non-child dependents
The bill will allow parents to take a $500 credit for each non-child dependent they are supporting, such as a child over 17 or an ailing elderly parent or adult child with a disability.
7. Lowers cap on mortgage interest deduction
Homeowners will no longer be allowed a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change.
8. Curbs who’s hit by AMT
This will reduce the number of filers who would be hit by it by raising 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.
9. Preserves smaller but popular tax breaks
This bill keeps all medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. They also would have repealed the tax-free status of tuition waivers for graduate students and actually expands the medical expense deduction for 2018 and 2019.
10. Exempts almost everybody from the estate tax
The bill essentially eliminates it for all but the smallest number of people by doubling the amount of money exempt from the estate tax.
11. Slows inflation adjustments in the tax code
The bill will use “chained CPI” to measure inflation, which is a slower measure than is used today. The net effect is your deductions, credits and exemptions will be worthless — since the inflation-adjusted dollars defining eligibility and maximum value would grow more slowly. It also would subject more of your income to higher rates in future years than would be the case under the current code.
12. Eliminates mandate to buy health insurance
There will no longer be a penalty for not buying insurance. While long a goal of Republicans to get rid of it, the measure also would help offset the cost of the tax bill. It is estimated to save money because it would reduce how much the federal government spends on insurance subsidies and Medicaid.
For Businesses And Corporations
13. Lower tax burden on pass-through businesses
The tax burden on owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — would be lowered by a 20% deduction.
The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).
14. Includes rule to prevent abuse of pass-through tax break
If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates.
But to prevent people from recharacterizing their wage income as business profits to get the benefit of the pass-through deduction, the bill would place limits on how much income would qualify for the deduction.
15. Slashes corporate rate
The bill cuts the corporate rate to 21% from 35%, starting next year. That’s somewhat higher than the 20% called for earlier. The increase was made to free up some revenue to accommodate lawmaker demands on other provisions. The bill would also repeal the alternative minimum tax on corporations.
16. Change how U.S. multinational are taxed
The final GOP bill proposes switching the U.S. to a territorial system. It also includes a number of anti-abuse provisions to prevent corporations with foreign profits from gaming the system.
In the meantime, it would require companies to pay a one-time, low tax rate on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets (e.g., equipment abroad in which profits were invested).
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