No matter the legislation, I’ve never been one to worry (or plan for) any bill until it’s signed. So, with the bill being signed this afternoon, it’s time to make these new, complex laws simple – all while translating it into language that explains how it affects you.
Standard Deduction Doubled:
Single tax filers see their standard deduction increase from $6,350 to $12,000 and couple married filing joint get an increase from $12,700 to $24,000. This means more deductions in most cases, especially for those who don’t typically itemize… and for those that do itemize, they might not need to any longer.
Child Tax Credit Gets Doubled:
What used to be a $1,000 credit for kids under 17 years of age will now be $2,000. In addition, the income limit above which the child tax credit is no longer allowed is also being increased to allow more individuals (up to $200,000 for single parents from $75,000 before) and couples (up to $400,000 for couples from $110,000 under the old plan) to take advantage.
New Credit for Non-Child Dependents:
Those who have a non-child dependent they’re supporting at their home, such as an elderly parent or grandparent or child 17 years of age or older, will now get a $500 credit for each dependent at home.
529 College Savings Plan Expansion:
In the past, one of the best ways to save for private K-12 school was through the use of a Coverdell plan, but the maximum contribution limits were always too low, in my opinion. Now, 529 plans will cover the cost of tuition for K-12 private schools (such as catholic school, etc.).
Tuition Assistance Paid by Employers Remains Tax-Free:
There was rumor that this benefit would go away with previous versions of the bill, but now that it’s signed, we know that any tuition paid by your employer, up to a maximum of $5,250 per year, will remain non-taxable.
Student Loan Interest Will Still Be Deductible:
Nothing changes when it comes to the enormous cost of higher education. You can still deduct the interest on your school loans, up to a maximum of $2,500 per year… as long as you’re single and make less than $80,000/year or married and make less than $165,000.
Personal Exemption No Longer Exists:
You used to be able to claim a $4,050 personal exemption for yourself, your spouse, and all of your dependents, which lowered your tax bill in the past, but this is now going away.
State and Local Tax Deductions Reduced:
In the past, there was no limit to the amount of state and local tax you could deduct against your taxes, but with the signing of this new bill, you’re capped at $10,000 going forward.
Mortgage Deduction Cap is Lower:
1st or 2nd mortgage interest could be deducted on a loan up to $1,000,000 in the past, but that maximum amount has been dropped to $750,000 for all those who take a new mortgage going forward (it does not affect current mortgages already in place). In addition, you can no longer deduct the interest on home equity lines of credit (HELOC), so rather than calculating a “net after tax” cost of HELOC interest, what you see is what you pay.
Fewer People Hit By Alternative Minimum Tax (AMT):
Income exemption levels for the sake of AMT (an additional tax the government levies when they think you didn’t pay enough after taking all your deductions) is raised from $54,300 to $70,300 for individuals and from $84,500 to $109,400 for couples. If you fall below these new, higher limits, you would likely not be affected by AMT in the future.
Medical Expenses, Student Loan Interest, Classroom Supplies, and Tuition Waivers:
Earlier versions of the bill that were tossed back & forth between congress and the senate eliminated many of these deductions, but the final bill that was signed today not only preserved all of them in their old/current form – it also expands the medical expense deduction for both 2018 and 2019. READ THIS if you’re a teacher. READ THIS if you’re a graduate college student.
No More Penalty if You Don’t Buy Health Insurance:
The new bill eliminates the tax penalty levied against anyone who decides not to buy health insurance on their own, through a group plan at work, or through the healthcare exchanges.
Estate “Death” Taxes Reduced:
Under the old system, any individual or surviving spouse who passed away with more than $5.49 million in total assets (including retirement savings, cash in the bank, personal property, house, cars, etc.) had to pay an additional tax of 40% on anything over that limit. The new law doubles this exemption to more than $10 million.
Everyone’s Income Taxes Go Down:
All tax brackets are being lowered across the board until at least 2025. I’ve included the old and new tax brackets and income limits below, but if you also want to see how you might be affected personally, check out this calculator: CLICK HERE TO USE THE TAX BILL CALCULATOR
Old Income Tax Brackets:
— 10% (income up to $9,275 for individuals; or $18,550 for married filing join)
— 15% (over $9,275 to $37,650; over $18,550 to $75,300 for couples)
— 25% (over $37,650 to $91,150; over $75,300 to $151,900 for couples)
— 28% (over $91,150 to $190,150; over $151,900 to $231,450 for couples)
— 33% (over $190,150 to $413,350; over $231,450 to $413,350 for couples)
— 35% (over $413,350 to $415,050; over $413,350 to $466,950 for couples)
— 39.6% (over $415,050+ ; over $466,950+ for couples)
NEW Income Tax Brackets:
— 10% (income up to $9,525 for individuals; or $19,050 for married filing join)
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
— 37% (over $500,000; over $600,000 for couples)
…and here’s another pictorial example of how different individuals and couples, married, single, working, retired – would be affected by the new tax laws:
Inflation on Deductions “Slowed Down”:
The old tax code used CPI (Consumer Price Index) to adjust the speed at which deductions increased over time. The new metric being used in the future will be something called “Chained CPI” (C-CPI) which causes deductions to rise slower over time, causing higher tax on future income.
No More Tax Deduction for Moving Expenses:
With the old tax laws, you could deduct your moving expenses even if you didn’t itemize on your tax return. With exceptions for those in the military who help defend our country and keep us safe, the new tax bill eliminates this deduction.
Your CPA or Accountant is No Longer Deductible:
In the past, you could deduct the cost of tax preparation by a professional or even the cost of Turbo Tax or Tax Cut if you’re one of those who like preparing your own tax return. Not anymore.
– Intermission –
That’s right… there’s more! Hey, I said I’d make it concise, but I didn’t say there wasn’t a ton of education here… Now, if you’re not a business owner, you might not care about the next few tax changes. If you are, however, keep on reading!
Bigger Income Tax Deduction for Owners, Partners, S-Corps, LLCs and Partnerships:
If you own – or if you’re a part owner in one of these types of businesses and you pay your business taxes through your individual tax returns, your income tax will be lowered by a 20% deduction. However, if you are in a service-based business and make less than $157,500 as an individual or $315,000 if you’re married, you do not get this deduction.
Pass-Through / Profits Will Be Taxed as Income:
If an owner or a partner in a business takes both profits from the company and draws a salary, that money will also be subject to ordinary income tax rules vs. before, when some income tax could be avoided.
Top Corporate Tax Rate Reduced:
The painful years of being one of the highest taxed countries in the world when it came to corporate tax rates are coming to an end. The top corporate tax rate is being permanently slashed from 35% to 21% and the new tax bill also eliminates AMT on corporations.
Tax Changes on Investment Purchases:
Before, there were complex rules that allowed for deducting investments in assets over several years. The new tax law allows for five years of full expensing, followed by an additional 5-year phase-out. In addition, the Section 179 (equipment) expensing limit is being increased from $500,000 to $1 million.
Reduces Tax Deduction on Net Operating Losses:
The old tax laws allowed businesses to deduct all net operating losses, but the new law limits deductions to 80% of taxable income.
Reduces Deduction on R&D Expenses:
In the past, money spent on research and development could be written off immediately in the current tax year. The new tax law forces businesses to deduct these expenses gradually, instead.
Taxes on Overseas Business Profits:
Today, businesses here have been held to a “worldwide” tax system where all income earned is taxed in the U.S. at domestic corporate tax rates, regardless of where the income is earned. This has made it difficult in the past for companies in the United States to compete, since most internationally headquartered companies pay less – or no tax at all to their governments on income earned overseas. Under the new tax laws, companies here in the U.S. are being switched to a similar, territorial system used by international companies in an attempt to level the playing field. The only caveat is that the law requires a one-time tax rate on their existing profits overseas, equivalent to 15.5% on cash assets and 8% on non-cash assets (equipment, etc.).
Well, we’ve come to the end of this summary, and this is the short version, I promise!
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