THE TRUMP TAX PLAN IS THE BIGGEST TAX CHANGE SINCE 1986
On December 20, 2017, the “Tax Cuts and Jobs Act of 2017,” also called the Trump Tax Plan, was passed by the House of Representatives and was the biggest piece of tax legislation since Ronald Reagan’s Tax Reform Act of 1986. This tax bill made a decrease in the tax rates for the majority of brackets for individuals but creates bigger savings for corporations by eliminating the corporate alternative minimum tax. Small businesses that implement a pass-through tax strategy can find significant savings as well. Businesses with incomes that come from outside the United States can benefit from these things as well.
Some reductions are temporary and are at the expense of some long-relied-on tax breaks. Most of the changes took effect in 2018. We have listed out the basics for you.
Tax Changes for Individuals and Couples
Changes in effect through 2025:
- Tax rates are reduced by up to 4% depending on the bracket (some remain unchanged), with tax rates ranging from 10-37%.
- The following are substantial increases in standard deductions:
- Couples filing jointly—$24,000, up from $12,700 previously.
- $12,000 if you’re single or married filing separately, up from $6,350 if you’re married filing jointly.
Heads of household—from $9,350 to $18,000
- Personal exemptions are no longer available.
- The child tax credit for dependent children has been increased to $2,000 per child.
- State and local tax deductions for itemized taxpayers, which were previously limitless, are now limited to $10,000.
- The mortgage debt ceiling has been lowered from $1 million to $750,000.
- Interest on home equity loan is no longer deductible.
- Individual deductions for casualties and theft losses are no longer available (unless it is for federally declared disasters)
- Several miscellaneous itemized deductions that only apply if they total more than 2% of your adjusted gross income have been eliminated (such as certain investments, professional fees, and unreimbursed expenses incurred through employment)
- Unless you are a member of the military, the moving expense deduction is no longer available.
- The alternative minimum tax exemption was raised to include:
- From $84,500 to $109,400 for married couples filing jointly
- From $54,300 to $70,300 if you’re single or the head of a household
- Married filing separately pay $54,700 instead of $42,250
- The gift and estate tax exemptions have been increased from $5 million to $10 million
Other alterations include:
- Taxpayers who would otherwise be penalized for not having health insurance under the Affordable Care Act will no longer be penalized (began in 2019)
- The medical cost deduction level has been lowered from 10% to 7.5% of adjusted gross income (in effect only 2017 and 2018)
- For 2017 and 2018, the AGI threshold for the medical cost deduction was reduced to 7.5% for both normal and AMT purposes.
- The coverage of Section 529 plan payments has been expanded to include expenses for elementary and secondary school, up to $100,000 per student per year.
Tax Changes for Businesses
- A new 20% eligible business income deduction is available to owners of partnerships, LLCs, S Corporations, and sole proprietorships (through 2025)
- Instead of a progressive rate of 15% to 35%, the corporate tax rate is now a flat 21%
- The alternative minimum tax on corporations is no longer in effect.
- Even if purchased secondhand, assets acquired and placed in service between September 27, 2017 and January 1, 2023 receive a bonus depreciation of 100%.
- The Section 179 cost ceiling has been increased to $1,000,000 (the phaseout level has been raised to $2,500,000).
- There are no longer any deductions for net interest expense that exceeds 30% of a company’s adjusted taxable income (subject to exceptions)
- Deductions for net operating losses are restricted to 80% of taxable income.
- Over the coming year, the domestic production activities deduction/manufacturers’ deduction (199 deduction) will be phased away.
- Employer-provided family and medical leave now has its own tax credit, which lasted until 2019.
- The $1,000,000 deduction for corporations that pay certain CEOs more than $1,000,000 is removed, as are the performance-based remuneration and commission exceptions.
- Employee fringe benefit deductions are now subject to new restrictions.
These are just a few of the most fundamental changes brought about by the Trump Tax Law. To take full benefit of the new bill, contact us.