The New Tax Plan and You

The Tax Cuts and Jobs Act (TCJA), also referred to as the New Tax Plan, has passed and many of us are wondering how will this impact us?

Before the passage of TCJA, tax legislation had not been radically changed since 1986. Needless to say, it is an exciting time for tax professionals. A chance to learn new tax legislation and help their clients effectively tax plan.

Not so exciting for taxpayers. When most people hear “tax reform”, they think additional regulation which means more taxes. 

In general, tax reform does not necessarily mean higher taxes. In fact, it could mean lower taxes. Tax reform simply means a change to the current tax system. The discussion of tax reform is a routine topic that has always been under political fire. Democrats, Republicans and all those in between have a broad stance on how the United States should collect taxes. 

Many versions of the Tax Cuts and Jobs Act were drafted. All November and December 2017 long, President Trump and Congress were going back and forth on the plan, trying to come to an agreement. Finally, on December 22, 2017, President Trump signed the final version of the bill, and tax reform was passed.

What Does the New Plan Mean to You

The new tax plan implements many changes to individual and corporate taxes. Some notable ones are corporate tax rates being reduced to 21% and top individual income rates being reduced to 37%. The standard deduction has doubled and personal exemptions have been eliminated. There are pros and cons to the new plan. Tax rates have generally decreased. At the same time, other tax advantages have been reduced or eliminated altogether. To really know how you are personally impacted, it is important to review the plan from all angles.

New Tax Plan: Income Taxes

There are still seven federal income tax brackets. Most of the new brackets are lower than what they were before. Though, there are some taxpayers that are in a higher bracket as a result of the new tax plan. These changes will be reflected in every employees’ 2018 paychecks. So if you noticed your paychecks have been a little higher or lower, it is likely attributed to the new tax plan.

One thing to note is that the new tax rates are set to revert back to 2017 rates in 2026.

The standard deduction has doubled from the 2017 amount of $6,350 to $12,000 for individual filers. This was intended to eliminate Schedule A itemized deductions and to simplify the tax filing process. The higher standard deduction will eliminate most taxpayers need to itemized deductions like mortgage interest or student loan interest. The new standard deduction will also revert back to 2017 amounts in 2026.

New Tax Plan: Other Changes

The New Tax Plan eliminates all exemptions. For years 2017 and prior, individuals were able to take exemptions for themselves, spouses and/or eligible dependents. Exemptions were equivalent to $4,050 per qualified individual and were applied as direct reductions to taxable income. For tax years 2018 through 2025, exemptions no longer exist. The higher standard deduction may or may not make up for the eliminated exemptions. That would depend on things like how many dependents you have, if you’re married, etc.

The New Tax Plan changes a significant number of itemized deductions. For example, alimony payments can no longer be deducted.

The plan reduces the amount of mortgage interest that can be deducted to up to a $750,000 mortgage, though mortgage holders who had a mortgage in 2017 or prior are not affected by this change.

The state and local tax deduction are now limited to $10,000 of state and local taxes paid, whereas before, it was limitless. The state and local tax deduction covered a wide range of taxes including sales, income and property taxes. Taxpayers had the option of choosing one and deducting all taxes paid.

The New Tax Plan decreased the threshold to claim the medical expense deduction. The threshold decreased from expenses over 10% of adjusted gross income to expenses over 7.5% of adjusted gross income. This means taxpayers can start using this deduction sooner. Although this is taxpayer friendly, the change is only expected to be applicable for the 2017 and 2018 tax years.

The casualty and loss deduction is now only limited to federally declared disasters. Taxpayers can no longer claim losses due to simple theft.

The New Tax Plan repeals the Affordable Care Act aka Obamacare. Specifically, the individual mandate requiring most people to have a minimum level of health care coverage. The penalty associated with the mandate has been repealed. This change, however, will not be effective until 2019. Individuals are still required to have health care coverage in the tax year 2018.

The child tax credit increases from $1,000 per qualifying child to $2,000. The credit is also more refundable. Before, families not making enough to actually owe taxes, would not reap the benefits of the credit. Now, those same families will get a check from the government.

The threshold for estate tax has doubled from $5.5 million to $11 million. Meaning the first $11 million of an inheritance is passed down tax-free.

Under the New Tax Plan, the corporate Alternative Minimum Tax (AMT) is eliminated. AMT is an additional tax paid by individuals or businesses that are considered high earners. The New Tax Plan raises the exemption amount for individual AMT from $120,700 to $500,000.

What Is Not Changing?

There are a number of items that remain the same after the passage of the New Tax Plan. Deductions for student loan interest and medical expenses have remained intact. There are no changes to the contributions and distributions treatments of 401(k) accounts.

What’s Next?

How are you personally impacted by tax reform?

There are a number of changes impacting individual and business taxes. Some are permanent changes and others are temporary. Ultimately it is your responsibility to keep up with these changes and to report/claim the appropriate income and deductions on your tax return.

Many Americans choose to work with an accountant to get an expert’s advice on what they should do. Consider the tax services offered at LYFE Accounting. We help our clients every day to save on their tax bill. Contact us today!