Since the campaign trail, President Trump has spoken frequently of tax reform, and the Tax Cuts and Jobs Act (TCJA) entails a number of changes to the U.S. tax code that will impact both corporations and individuals.
Prominent economists and experts believe this tax bill may provide a boost to the economy, but by how much we don’t know. The Joint Committee on Taxation believes the bill will boost growth the total size of the US GDP by 0.8 percentage points over the first decade, while Goldman Sachs is estimating GDP growth will increase 0.3 percentage points above their baseline over the next two years.
No matter how much economic growth we can expect in the coming years, the big question is, what exactly does this bill mean for you? In a nutshell, families and business owners may see significant cuts to their tax bills immediately and over the long-term, as well as a number of benefits for businesses. Here’s what you can expect from this bill.
Individuals and Families
One of the biggest changes is the adjustment to tax brackets, with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest tax bracket was reduced from 39.6% to 37%. In general, the tax bill favors wealthier Americans, offering more tax breaks the more you earn. The Tax Policy Center estimates that 65.8% of the total federal tax benefit will go to the top 20% of earners. (1)
Here’s the breakdown of the new tax brackets:
Along with a change to tax brackets, changes were made to the standard deduction and personal exemptions. Through 2025, the standard deduction has increased to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals.
Personal Exemptions and Itemized Deductions
All personal exemptions are repealed through 2025, as are the overall limitation on itemized deductions. While the bill keeps the itemized deduction for state and local taxes, it caps it at a combined $10,000 for property and income or sales tax for married filers and $5,000 for single filers.
This means many people will now be taking the standard deduction. However, for some wealthy families, this may be lower than they normally itemize. If you normally pay $30,000 in taxes, you’ll now only be able to deduct $10,000.
And while the tax bill will keep the mortgage interest tax deduction, the total amount you can deduct has lowered from $1 million to $750,000. Additionally, as explained, you can’t deduct more than $10,000 in property taxes through 2025.
Child and Family Tax Credit
On the plus side, if you have children under the age of 17, the credit amount increases from $1,000 to $2,000 and increases to $1,400 for the refundable portion of the credit. Additionally, there is a new, nonrefundable $500 credit for dependents who are over the age of 17.
Lastly, the adjusted gross income level now starts to phase out at $200,000 for individual filers and $400,000 for joint filers. If you were previously ineligible due to your high income, you may now be able to claim this credit.
Estate and Gift Tax Exemption
Several changes were made that will impact estate planning, but may benefit wealthier families. For one, the basic exclusion amount has nearly doubled to $11.2 million for an individual or $22.4 million for a married couple.
Additionally, after 2023, the estate tax and generation-skipping taxes will be repealed but beneficiaries would still enjoy a step-up in basis for their inherited property. And finally, the gift tax remains, but with a top rate of 35%. There would still be an overall lifetime basic exclusion amount as mentioned above, twice the current amount. The annual exclusion would remain the same at $14,000, though it would increase with inflation.
While the AMT was retained for individuals, the exemption increased to $109,400 for married couples, $70,300 for individuals, and $54,700 for married couples filing separately. The exemption phases out for those with an alternative minimum taxable income of $1 million or more for married couples and $500,000 for individuals and married couples filing separately.
Qualified Business Income Deduction
This new deduction will benefit individuals and families with businesses, as you can now deduct equal to 20% of “qualified business income” (also known as “pass-through income”), which is income you receive from a sole proprietorship, partnership, LLC, or S corporation. This deduction reduces your taxable income but not your adjusted gross income.
There are a few caveats. Investment income is not considered as “qualified” nor is any amount you receive from a partnership as a guaranteed payment for services you provide to the business or any amount you receive from an S corporation as reasonable compensation.
Big businesses will significantly benefit from the TCJA, namely with the federal corporate tax rate dropping from 35% to 21%.
The act also repeals the corporate AMT and adjusts depreciation limits. For example, the bonus depreciation under Section 168(k) was extended and modified, now allowing businesses to deduct 100% of the cost of eligible property in the same year it’s placed in service through 2022.
Another change is that taxpayers averaging annual gross receipts of $25 million or less in the three prior tax years can now use the cash method.
Companies will likely see a serious boost in their profits, with JPMorgan estimating that this bill will boost the earnings per share of S&P 500 companies by $10 per share in 2018. (2) Additionally, some experts estimate that giant companies like Google will save several billion dollars in 2018 due to the new tax code.
With these tax cuts, businesses may use these savings to increase wages, pay down debt, invest, or pay for capital expenditures, which could benefit their long-term value.
What Does All Of This Mean?
Thanks to this Tax Cuts and Jobs Act, I believe many people will benefit in the short-term from the cuts made, while also benefiting over the long-term, as we can expect to see economic expansion due to the lowering of corporate taxes and more higher paying jobs. I am optimistic about the future and how these tax changes can help people with their financial planning and allow businesses the opportunity to expand and positively impact employment,
With so many changes, now is a good time to speak with your financial advisor to review your financial plan and retirement plan to see how your strategies may be impacted by the TCJA and whether or not it’s appropriate to make adjustments.
At Beacon Wealth Management, we want to make sure that we always have the most up-to-date understanding of your personal situation. Our periodic financial checkups are designed to ensure that when your life changes, your wealth strategy evolves with it. Whether you’re a current client with us or have yet to work with a financial advisor, contact us for a financial checkup. Call (304) 626-3900 or email me firstname.lastname@example.org.