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New Tax Code!

PLEASE NOTE:YOUR 2017 INCOME TAX RETURN ALONG WITH PREVIOUS YEARS, WILL NOT BE AFFeCTED BY NEW TAX LAWS! come in for tax planning. 


Commentary
With the New Year comes an overhauled tax code. The bill was passed by congress on December 22, 2017 and signed by President Trump into law, a few days afterward. The bill is 1097 pages long, and can be complex and confusing. This bill does not replace the old tax code, but it does modify it. Also, the IRS still needs to make some clarifications on certain parts of this law. In this commentary we do not give any political opinions, nor do we take sides in the tax reform debate, who it benefits, and whom it hurts. We will present, to the best of our ability, just the facts. Further down this page, you will find parts of an article written by David Floyd for Investopedia, that we felt were important for you to know about. In it, he tries to "summarize" the new tax provisions. To see the full article, please click here.
This article by no means, is intended to substitute the advice from licensed tax professionals like ourselves. Also, the parts of that article cited on this website, cover the main sections dealing with individual taxation. Corporate tax reform provisions are a totaly separate and equally complex issue. 
For more information, please contact us to to schedule a time to sit and talk to you about your individual tax or business tax issues, so we can help you plan ahead. Finally, please check our Facebook page for up to date posts about tax reform and other issues. 
- J. Michael Honrales, E.A.
  Tax Accountant
  Admitted to Practice Before the Internal Revenue Service



Investopedia Article

"Trump's Tax Reform Plan"
By David Floyd
Published on January 12, 2018

PERSONAL TAXES

Income Tax RatesThe law retains the current structure of seven individual income tax brackets, but in most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%, and the 35% bracket is also unchanged. The income bands that the new rates apply to are lower, compared to 2018 brackets under current law, for the five highest brackets.

Single filers, 2018-2025
Taxable income overUp toMarginal rate
$0$9,52510%
$9,525$38,70012%
$38,700$82,50022%
$82,500$157,50024%
$157,500$200,00032%
$200,000$500,00035%
$500,000And up37%
Heads of household, 2018-2025
Taxable income overUp toMarginal rate
$0$13,60010%
$13,600$51,80012%
$51,800$82,50022%
$82,500$157,50024%
$157,500$200,00032%
$200,000$500,00035%
$500,000And up37%
Married couples filing jointly, 2018-2025
Taxable income overUp toMarginal rate
$0$19,05010%
$19,050$77,40012%
$77,400$165,00022%
$165,000$315,00024%
$315,000$400,00032%
$400,000$600,00035%
$600,000And up37%
Married couples filing separately, 2018-2025
Taxable income overUp toMarginal rate
$0$9,52510%
$9,525$38,70012%
$38,700$82,50022%
$82,500$157,50024%
$157,500$200,00032%
$200,000$300,00035%
$300,000And up37%
Source: Joint Committee on Taxation.


The changes will be temporary, going into effect in 2018 and expiring after 2025, as is the case with most personal tax breaks included in the law. The expiration date allows the Senate to comply with "reconciliation" rules that block a Democratic filibuster – which Republicans do not have the votes to defeat – only if the law does not raise the deficit in any year outside of a 10-year window and if it stays within its $1.5 trillion budget constraint during the 10-year window. Republican congressional leaders have signaled that individual tax cuts will be extended at a later date.

The IRS has released new withholding brackets reflecting changes to the personal income tax schedule, which employers must begin using by Feb. 15.

Standard Deduction

The law raises the standard deduction to $24,000 for married couples filing jointly in 2018 (from $13,000 under current law), to $12,000 for single filers (from $6,500), and to $18,000 for heads of household (from $9,550). These changes expire after 2025. The additional standard deduction, which the House bill would have repealed, will not be affected. Beginning in 2019, the inflation gauge used to index the standard deduction will change in a way that is likely to accelerate bracket creep (see below).

Personal Exemption

The law suspends the personal exemption, which is currently set at $4,150 in 2018, through 2025.

Healthcare Mandate

The law ends the individual mandate, a provision of the Affordable Care Act or "Obamacare" that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. (While the mandate technically remains in place, the penalty falls to $0.) According to the Congressional Budget Office (CBO), repealing the measure is likely to reduce federal deficits by around $338 billion from 2018 to 2027, but lead 13 million more people to lack insurance at the end of that period and push premiums up by an average of around 10%. Unlike other individual tax changes, the repeal will not be reversed in 2025.

Family Credits and Deductions

The law temporarily raises the child tax credit to $2,000, with the first $1,400 refundable, and creates a non-refundable $500 credit for non-child dependents. The child credit can only be claimed if the taxpayer provides the child's Social Security number. (This requirement does not apply to the $500 credit.) Qualifying children must be younger than 17. The child credit begins to phaseout when adjusted gross income exceeds $400,000 (for married couples filing jointly, not indexed to inflation). Under current law, phaseout begins at $110,000. These changes expire in 2025.

Head of Household

Trump's revised campaign plan, released in 2016, would have scrapped the head of household filing status, potentially raising taxes on 5.8 million single-parent households, according to an estimate by the Tax Policy Center (TPC). The law leaves the head of household filing status in place.

Itemized Deductions

Mortgage Interest Deduction

The law limits the application of the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under current law, but up from $500,000 under the House bill. Mortgages taken out before Dec. 15 are still subject to the current cap. The change expires after 2025.

State and Local Tax Deduction

The law caps the deduction for state and local taxes at $10,000 through 2025. The SALT deduction disproportionately benefits high earners, who are more likely to itemize, and taxpayers in Democratic states. A number of Republican members of Congress representing high-tax states opposed attempts to eliminate the deduction, as the Senate bill would have done.

Other Itemized Deductions

The law leaves the charitable contributions deduction intact, with minor alterations (if a donation is made in exchange for seats at college athletic events, it cannot be deducted, for example). The student loan interest deduction is not affected (see "Student Loans and Tuition" below). Medical expenses in excess of 7.5% of adjusted gross income are deductible for all taxpayers – not just those aged 65 or older – in 2017 and 2018; the threshold then reverts to 10%, as under current law.

The law does, however, suspend a number of miscellaneous itemized deductions through 2025, including the deductions for moving expenses, except for active duty military personnel; home office expenses; laboratory breakage fees; licensing and regulatory fees; union dues; professional society dues; business bad debts; work clothes that are not suitable for everyday use; and many others. The moving expenses deduction is also suspended. Alimony payments will not longer be deductible after 2019; this change is permanent.

Student Loans and Tuition

The House bill would have repealed the deduction for student loan interest expenses and the exclusion from gross income and wages of qualified tuition reductions. The law leaves these breaks intact. The conference bill would also have extended the use of 529 plans to K-12 private school tuition, but that provision was struck down by the Senate parliamentarian as ineligible to be passed through reconciliation.


President Trump signed the "Tax Cuts and Jobs Act" into law on Dec. 22. The Senate passed the bill on Dec. 20 by a party-line vote of 51 to 48; Sen. John McCain (R-Ariz.) was absent for medical treatment. The House passed the bill later in the day by a vote of 224 to 201. No House Democrats supported the bill, and 12 Republicans voted no, most of them representing California, New York and New Jersey; taxpayers who itemize in these high-tax states are likely to be hurt by the legislation's cuts to the state and local tax deduction.

It was the House's second vote on the bill in a week. Having passed the legislation Tuesday, they were forced to amend it after the Senate parliamentarian struck down three of its provisions. These could not be passed under the fast-track reconciliation procedure Republicans used to avoid a Democratic filibuster, the parliamentarian ruled.

The overhaul is forecast to raise the federal deficit by hundreds of billions of dollars – and perhaps as much as $2.0 trillion – over the coming decade. Estimates vary depending on assumptions about how much economic growth the law will spur, but no independent estimates follow Treasury Secretary Steven Mnuchin in predicting a net reduction to the national debt as a result of the overhaul.

AnchorThe law cuts corporate tax rates permanently and individual tax rates temporarily. It permanently removes the individual mandate, a key provision of the Affordable Care Act, which is likely to raise insurance premiums and significantly reduce the number of people with coverage. The highest earners are expected to benefit most from the law, while the lowest earners may actually pay more in taxes once most individual tax provisions expire after 2025.

Provisions

PERSONAL TAXES

Income Tax Rates

The law retains the current structure of seven individual income tax brackets, but in most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%, and the 35% bracket is also unchanged. The income bands that the new rates apply to are lower, compared to 2018 brackets under current law, for the five highest brackets.

The changes will be temporary, going into effect in 2018 and expiring after 2025, as is the case with most personal tax breaks included in the law. The expiration date allows the Senate to comply with "reconciliation" rules that block a Democratic filibuster – which Republicans do not have the votes to defeat – only if the law does not raise the deficit in any year outside of a 10-year window and if it stays within its $1.5 trillion budget constraint during the 10-year window. Republican congressional leaders have signaled that individual tax cuts will be extended at a later date.

Single filers, 2018-2025
Taxable income overUp toMarginal rate
$0$9,52510%
$9,525$38,70012%
$38,700$82,50022%
$82,500$157,50024%
$157,500$200,00032%
$200,000$500,00035%
$500,000And up37%
Heads of household, 2018-2025
Taxable income overUp toMarginal rate
$0$13,60010%
$13,600$51,80012%
$51,800$82,50022%
$82,500$157,50024%
$157,500$200,00032%
$200,000$500,00035%
$500,000And up37%
Married couples filing jointly, 2018-2025
Taxable income overUp toMarginal rate
$0$19,05010%
$19,050$77,40012%
$77,400$165,00022%
$165,000$315,00024%
$315,000$400,00032%
$400,000$600,00035%
$600,000And up37%
Married couples filing separately, 2018-2025
Taxable income overUp toMarginal rate
$0$9,52510%
$9,525$38,70012%
$38,700$82,50022%
$82,500$157,50024%
$157,500$200,00032%
$200,000$300,00035%
$300,000And up37%
Source: Joint Committee on Taxation.

The IRS has released new withholding brackets reflecting changes to the personal income tax schedule, which employers must begin using by Feb. 15.

Standard Deduction

The law raises the standard deduction to $24,000 for married couples filing jointly in 2018 (from $13,000 under current law), to $12,000 for single filers (from $6,500), and to $18,000 for heads of household (from $9,550). These changes expire after 2025. The additional standard deduction, which the House bill would have repealed, will not be affected. Beginning in 2019, the inflation gauge used to index the standard deduction will change in a way that is likely to accelerate bracket creep (see below).

Personal Exemption

The law suspends the personal exemption, which is currently set at $4,150 in 2018, through 2025.

Healthcare Mandate

The law ends the individual mandate, a provision of the Affordable Care Act or "Obamacare" that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. (While the mandate technically remains in place, the penalty falls to $0.) According to the Congressional Budget Office (CBO), repealing the measure is likely to reduce federal deficits by around $338 billion from 2018 to 2027, but lead 13 million more people to lack insurance at the end of that period and push premiums up by an average of around 10%. Unlike other individual tax changes, the repeal will not be reversed in 2025.

Senators Lamar Alexander (R-Tenn.) and Patty Murray (D-Wash.) proposed a bill, the Bipartisan Health Care Stabilization Act, to mitigate the effects of repealing the individual mandate, but the CBO estimates that this legislation will still leave 13 million more people uninsured after a decade.

Inflation Gauge

The law changes the measure of inflation used for tax indexing. The Internal Revenue Service (IRS) currently uses the consumer price index for all urban consumers (CPI-U), which will be replaced with the chain-weighted CPI-U. The latter takes account of changes consumers make to their spending habits in response to price shifts, so it is considered to be more rigorous than standard CPI. It also tends to rise more slowly than standard CPI, so substituting it will likely accelerate bracket creep. The value of the standard deduction and other inflation-linked elements of the tax code will also erode over time, gradually pushing up tax burdens. The change is not set to expire.

IFrame

Family Credits and Deductions

The law temporarily raises the child tax credit to $2,000, with the first $1,400 refundable, and creates a non-refundable $500 credit for non-child dependents. The child credit can only be claimed if the taxpayer provides the child's Social Security number. (This requirement does not apply to the $500 credit.) Qualifying children must be younger than 17. The child credit begins to phaseout when adjusted gross income exceeds $400,000 (for married couples filing jointly, not indexed to inflation). Under current law, phaseout begins at $110,000. These changes expire in 2025.

Head of Household

Trump's revised campaign plan, released in 2016, would have scrapped the head of household filing status, potentially raising taxes on 5.8 million single-parent households, according to an estimate by the Tax Policy Center (TPC). The law leaves the head of household filing status in place.

Itemized Deductions

Mortgage Interest Deduction

The law limits the application of the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under current law, but up from $500,000 under the House bill. Mortgages taken out before Dec. 15 are still subject to the current cap. The change expires after 2025.

State and Local Tax Deduction

The law caps the deduction for state and local taxes at $10,000 through 2025. The SALT deduction disproportionately benefits high earners, who are more likely to itemize, and taxpayers in Democratic states. A number of Republican members of Congress representing high-tax states opposed attempts to eliminate the deduction, as the Senate bill would have done.

IFrame

The Senate bill was amended on Dec. 1, apparently to win Susan Collins' (R-Maine) support:


Other Itemized Deductions

The law leaves the charitable contributions deduction intact, with minor alterations (if a donation is made in exchange for seats at college athletic events, it cannot be deducted, for example). The student loan interest deduction is not affected (see "Student Loans and Tuition" below). Medical expenses in excess of 7.5% of adjusted gross income are deductible for all taxpayers – not just those aged 65 or older – in 2017 and 2018; the threshold then reverts to 10%, as under current law.

The law does, however, suspend a number of miscellaneous itemized deductions through 2025, including the deductions for moving expenses, except for active duty military personnel; home office expenses; laboratory breakage fees; licensing and regulatory fees; union dues; professional society dues; business bad debts; work clothes that are not suitable for everyday use; and many others. The moving expenses deduction is also suspended. Alimony payments will not longer be deductible after 2019; this change is permanent.

Alternative Minimum Tax

The law temporarily raises the exemption amount and exemption phaseout threshold for the alternative minimum tax (AMT), a device intended to curb tax avoidance among high earners by making them estimate their liability twice and pay the higher amount. For married couples filing jointly, the exemption rises to $109,400 and phaseout increases to $1,000,000; both amounts are indexed to inflation. The provision expires after 2025.

Retirement Plans and HSAs

Health Savings Accounts (HSAs) are not be affected by the law, as they would have been under the bill passed by the House.

Reports circulated in October that traditional 401(k) contribution limits could fall to $2,400 from the current $18,000 ($24,000 for those aged 50 or older). Individual retirement account (IRA) contribution limits, currently $5,500 ($6,500 for 50 or older), may also have been considered for cuts. The law leaves these limits unchanged, but repeal the ability to recharacterize one kind of contribution as the other, that is, to retroactively designate a Roth contribution as a traditional one, or vice-versa.

Student Loans and Tuition

The House bill would have repealed the deduction for student loan interest expenses and the exclusion from gross income and wages of qualified tuition reductions. The law leaves these breaks intact. The conference bill would also have extended the use of 529 plans to K-12 private school tuition, but that provision was struck down by the Senate parliamentarian as ineligible to be passed through reconciliation.