There has been much debate and discussion about the new tax bill which went into effect on January 1, 2018. Overall, the Tax Cuts and Jobs Act are expected to benefit most Americans this year and for many years to come. The markets and many taxpayers are already optimistic. According to the CNBC/SurveyMonkey Small Business Survey released on Tuesday, February 20, small-business confidence is at a record-high in 2018 among small-business owners. Per the release, “Twice as many now expect changes in tax policy to have a positive rather than negative effect on their businesses.”
In the article, we summarize a variety of the changes to the tax law to help simplify the bill. PLEASE NOTE: We are NOT tax experts. Please consult your CPA with specific questions.
Lower Tax Rates
One of the major aspects of the reform is lower tax rates, whether as an individual, married couple, or corporation. A single or married tax payer that earns the same amount of money in 2018 as compared to 2017 will be able to keep more money in 2018, thus having more discretionary income. For instance, a joint filing married couple earning $250,000 of taxable income would have been in a 33% federal tax bracket in 2017. In 2018, the same couple making $250,000 is now in a 24% federal tax bracket – that is a 9% decrease or approximately $8,500 in tax savings!
In addition to individual tax rates being cut, the corporate tax rate was cut from 35%-21%, giving businesses more flexibility and allowing businesses to pass down those savings to their employees and re-invest in their companies. Many businesses have already given employees bonuses based on the initial cost savings. Companies can grow their businesses and create new jobs plus introduce/expand profit-sharing programs and increase wages for current employees.
What does this all mean? More money in people’s pockets to either save (retirement accounts, education accounts, etc.) or spend (new clothes, new cars, going out to eat, etc.) is expected to have a positive impact on the economy.
529 Savings Accounts & Retirement Accounts
A 529 plan is an education savings account that is often times a state-sponsored savings plan for college costs. The new act greatly increases the usability of 529 plans and allows taxpayers to use the tax-advantaged account for K-12 tuition as well as expenses such as tutoring. This provides American families with more options when it comes to their child’s education costs, and may make sense for some to utilize this money to fund pre-college costs.
The new bill also increases 401k contributions limits by $500 from a year ago. The act maintains the ability of individuals over 50 years of age to contribute a “catch up” contribution of $6,000 over and above the allotted $18,500 ($18,000 in 2017). While the increase for retirement savings isn’t monumental, every little bit helps in planning for retirement.
Estate Tax Changes
The estate tax exemption increased dramatically from $5.49 million in 2017 to $11.2 million in 2018 with married couples being exempt from $22.4 million. The provision does sunset in 2025. This change will obviously benefit the ultra-wealthy, but there is no real benefit to the majority of American families.
Mortgages and Home Equity Lines
The new law allows homeowners with existing mortgages to continue to deduct interest up to a total of $1 million of mortgage debt on a first and second home. However, for new homebuyers the limit is now capped at $750,000 for a first and second home. Additionally, taxpayers could previously deduct the interest from a home equity line up to $100,000, but these deductions are more limited in 2018.
Other revisions to the tax code:
- Increased standard deductions from $12,700 to $24,000 for married filing jointly and from $6,350 to $12,000 for single filing
- Taxpayers deductions for property taxes and state/local taxes are limited to $10,000 for couples who file jointly
- Removed deductions for moving expenses, unreimbursed employee expenses, tax preparation expenses and misc. expenses
- Child and Dependent Tax Credits have increased per qualified child
- Changed how pass through entities can deduct 20% of domestic qualified business income
These tax law changes are the first significant changes we have seen to the tax code in over thirty years. The bill is merely a few months old at this point, so the effects of these changes have yet to be realized. Taxpayers should be encouraged to learn as much as possible about the bill and capitalize on the benefits in the coming years as several of the provisions are to be re-evaluated in 2025.
Download the GENCapital 2017-2018 Tax Comparison.
For more information about the tax reform, visit www.irs.gov/newsroom/tax-reform.
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