Like him or hate him, President Trump recently passed his first major legislation while in office with the tax reform bill passing through the senate in a 51-48 vote.
The Tax Cuts and Jobs Act (“Tax Act”) not only substantially reduced the corporate tax rate, but made significant changes to individual taxes as well.
The following are some of the most impactful changes to individual taxes that take effect in tax year 2018.
Tax Brackets. The rates of the seven tax brackets were slightly reduced to 12%, 22%, 24%, 32%, 35%, and 37%.
Standard Deduction & Exemptions. While the standard deduction was roughly doubled, personal exemptions were completely removed.
To put this in perspective, the standard deduction plus exemptions for a family of three totaled $24,850 in 2017, and will total $24,000 in 2018. A family of five’s deductions in 2017 totaled $32,950, but will only total $24,000 in 2018.
Child Tax Credit. The child tax credit doubles from $1,000 to $2,000 per child.
Mortgage Interest Deduction. If you itemize deductions, you can deduct mortgage interest paid on mortgage debt of up to $750,000, down from $1 million in 2017.
Interest paid on home equity debt is no longer deductible.
State and Local Tax Deduction. When itemizing deductions, the aggregate deduction for state and local income, sales, and property taxes is limited to $10,000.
This deduction was previously unlimited, and its constraint will be staggeringly felt by taxpayers in high tax states and localities such as California and New York City.
Pass-Through Deduction. Taxpayers can now deduct 20% of their pass-through income from sole-proprietorships, LLCs, partnerships, and S Corporations.
There are phase-outs and other limitations that apply, but to over-simplify, if you own a small business and it generates $100,000 of net income in 2018, you may be able to deduct $20,000.
To discuss how these, and other changes, might impact you, please contact FOS’s tax attorneys.