The Tax Cuts and Jobs Act is one of the most drastic tax overhauls since President Bush’s changes in 2001 and 2003. Here are some of the highlights that might affect you, your family or your business:
Tax Cuts and Jobs Act For Corporations and Small Businesses:
Overall, the Tax Cuts and Jobs Act is a win for corporations. Corporate America’s tax rate dropped from 35 percent to 21 percent permanently. It also repealed the alternative minimum tax for corporations. That is a safeguard that ensures companies pay back some of their credits and deductions.
Companies that span multiple countries also received a “territorial” tax rate reduction for offshore earnings. Some of that money can now be considered domestic earnings for tax discounts. The hope is that companies will invest those foreign earnings in the U.S. economy.
There are perks for small businesses, too, though comparatively less. “Small businesses” including LLCs, sole proprietors, partnerships and Sub S Corps will receive a 20% deduction for qualified business income (with some caveats.)
Then there’s the Section 179 deduction, which allows small businesses to write off expensive purchases at once instead of spreading them out over several years. This tax code allowed a business to write off up to $500,000 in expenses, but that limit is up to $1 million for the 2018 tax year.
To sum up, corporations are receiving about 40% in permanent tax cuts, and small businesses are receiving around 20% that are set to expire in 2025.
Most Americans will see a decrease in what they owe, at least for the next eight years. The Tax Cuts and Jobs Act will decrease the tax rates for each income level and increase the standard deduction to nearly double its current rate. However, it will eliminate personal exemptions, which amounted to $4,050 per person in 2017. These individual tax cuts are temporary. They will expire after 2025.
Standard deductions for 2018 are $12,000 for single or married filing separately, $24,000 if you’re filing jointly with your spouse and $18,000 for head of household. There are additional deductions for taxpayers who are blind or over 65 ($1,300), and unmarried people ($1,600.)
Itemized deductions have also seen some changes. For homeowners, only the interest related to buying, building or drastically improving your home will be deductible. This is called “acquisition indebtedness.” That means for many home equity loans, the interest will not be deductible anymore.
State, local and foreign property taxes and income taxes are still deductible, but there is a limit on this. The total deduction amount is capped at $10,000 annually, or $5,000 for married people filing separately.
Personal casualty losses – those would include losing your property to storms, fire, theft, etc. – won’t be deductible unless the losses are attributed to federally declared disasters.
Medical expense deductions are still around, and through 2018, the deductibility will be 7.5% of adjusted gross income instead of 10%.
Other Important Changes
The child tax credit is more generous, and applies to more people now. Currently, the tax credit is $1,000 per child. That has expanded to up to $2,000 per child, and is eligible for families making up to $400,000.
Remember how I mentioned that corporations no longer have an alternative minimum tax? The tax act remains for individuals, though it is changing.
The individual AMT currently kicks in for individuals making more than $120,700 and married couples earning over $160,900. But the Senate bill increases that threshold to $500,000 for individuals and $1 million for married couples.
There is a chance that families earning $200,000 to $500,000 will have to pay AMT as well, though it would be a smaller payment than before.
The top tax rate is also lower. The highest rate for married couples earning more than $470,700 currently tops out at 39.6 percent. High earners (meaning $500,000 in income for individuals and $600,000 for married couples) would be taxed at 37 percent under the tax changes.
The Affordable Care Act’s individual mandate has also been repealed. However, this does not go into effect until 2019.
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