On Dec. 22, 2017, President Trump signed the “Tax Cuts and Job Act” into the law. The Senate passed the bill on Dec. 20 and the House passed the bill later. The bill individual tax cut is temporarily until 2025. The income tax overhaul is forecast to raise the federal deficits by substantial amounts, so not a welcome change unless spending is curtailed. People who take itemized deductions in high tax rate states (NY, CA, etc) will be hurt since the law caps the itemized deduction which includes deductions for property taxes paid, and mortgage interest. The Act removes ACA personal mandate, which was a primary provision of Affordable Act. Below, I will give you a grasp of how the tax reform bill affects your taxes as an individual.
At first, we review the individual income tax rates. The tax reform bill retains the current structure of seven income brackets. Mostly, it lowers tax rates. The highest rate comes down from 39.6% to 37%, meanwhile the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22% and 15% bracket to 12%. The lowest tax rate of 10% and the 35% bracket remain unchanged. The income threshold also changed accordingly. All thresholds will be indexed for inflation in tax years after Dec. 31, 2018. This was a good move, to help boost the economy
Normally, an individual can reduce AGI (adjusted gross income) by taking itemized deductions or standard deduction. The tax reform bill made a big change to standard deduction as well. Prior to the reform, the standard deduction is based on filing status. For example, for tax year 2017, the standard deduction for single individuals or married filing separate is $6,350, for married individuals who file jointly returns is $12,700 and for heads of households is $9,350. The tax reform bill increases standard deduction significantly. For single individuals, married individuals who file joint returns and heads of households, the standard deduction increases to $12,000, $24,000, and $18,000 respectively. The increased standard deduction is effective for tax years after Dec. 31, 2017 (so your 2018 taxes). The problem with this approach is that if you live in a high tax state, and your itemized deductions are capped, then the standard deduction will be higher than your itemized deduction and you lose out on the difference between the uncapped itemized deduction amount and the standard deduction.
Furthermore, tax reform bill repeals deduction for personal exemptions. This rule comes effective after Dec.31, 2017, and before Jan. 1, 2026. Prior to tax reform bill, for example, an individual can deduct $4,050 for each person exemption for 2017, for instance. Therefore, this will disproportionately affect large families. The child tax credit was increased, so that will mitigate the negative effect of losing personal exemptions.
Mostly, taxpayers are required to compute their income for regular tax and alternative minimum tax. A taxpayer’s tax liability is the greater of his/her regular tax liability or their AMT liability. For tax years after Dec. 31, 2017 and before Jan. 2018, the Act increases AMT exemptions for qualified individuals, so that will be helpful.
In next following blog posts, we will continue discuss more about new Tax Act and its implications for individual and corporate.