The first major tax overhaul since Ronald Reagan was president was signed into law on December 24, 2017 and it has a lot of people wondering what is going to change. In case you need some perspective on the time – the year Ronald Reagan enacted his tax reform Top Gun was the highest grossing film of the year and the average cost of a new house in the USA was $89,430! This tax reform bill will affect everyone a little bit differently and it is a major change to how we will file taxes, so let’s dig in.
Piper Accounting Solutions has done some initial research into the bill and we have put together the following list of, what we think are, the most important pieces of the new legislation and how they might affect you.
- The tax reform bill will NOT be in effect for the 2017 tax year! The bill is effective for tax year 2018 and the individual provisions are to expire in 2025. The corporate provisions will be permanent. (Which could be as permanent as long as the current administration lasts.)
- There are still 7 tax brackets, but the bill lowers many of the individual 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%. (They threw in a .6% for good measure!)
- It will nearly double the standard deduction. For single filers, the bill increases the standard deduction from $6,350, currently, to $12,000; for married filers it increases it from $12,700 to $24,000. This will drop the number of filers who itemize dramatically, since the only reason to do so is if your deductions exceed your standard deduction.
- It eliminates personal exemptions. Today there is a personal exemption allowable for yourself, your spouse and each of your dependents. For families with three or more kids, this could remove any tax relief they may have gotten through any other part of the tax reform bill.
- It caps the state and local tax deduction. Currently you can deduct your state and local property taxes plus income or sales taxes with no limit. The new bill caps the deduction at $10,000.
- The bill extends the child tax credit. The credit will be doubled to $2,000 for dependents under the age of 17. It is also available to high earners because the tax bill would raise the income threshold to $200,000 for single parents, currently it’s $75,000; and to $400,000 for married filers, currently $110,000.
- Creates a new, temporary, credit for non-child dependents. This will allow filers to take a $500 credit for each non-child dependent they are supporting, such as children over age 17, an elderly parent or an adult child with a disability. (A big win, we must say.)
- You can still deduct medical expenses. They expanded this provision for two years and they lowered the threshold from 10% to 7.5%, meaning you can deduct your major medical expenses that add up to more than 7.5% of your adjusted gross income.
- The mortgage interest deduction has been lowered. The mortgage interest will only be deductible on the first $750,000 of mortgage debt, down from $1,000,000. Don’t worry if you already own a home, this is in effect for anyone buying a new home.
- The tax deduction for alimony payments is gone. Currently, the person paying alimony to their ex-spouse can deduct the amount paid and the person collecting alimony must claim it as income. This provision of the new law will apply to divorces or legal separations effective after December 31, 2018. (This bill was originally to go into effect for divorces taking place after December 31, 2017 but a committee meeting was held to change it to 2018. I’m thinking you’re going to see a LOT of Congressmen divorcing this year!)
- The individual mandate on health insurance has been eliminated. Obamacare has not been repealed but one of the key provisions of it is gone. This goes into effect in 2019. (Woohoo! No more penalty!)
- Teachers can still deduct up to $250 of expenses they personally spent on classroom materials.
- You can still deduct student loan interest, up to $2500 per year.
- The deduction for moving expenses is gone.
- The deduction for tax preparation fees is gone.
There is so much more to this bill than what I have covered here. A follow up blog about how the tax reform is going to affect Partnerships and Corporations will be posted soon! If you have any questions, please don’t hesitate to give us at Piper Accounting Solutions a call.