Monthly Archives: January 2018

What to Expect from the Tax-Overhaul Plan

Happy New “Tax” Year!

We’ve welcomed in 2018 and President Trump’s new tax-overhaul plan, which was signed into law on December 22. Even though most of us have already received our first payroll check of the new year, we haven’t seen any changes. The IRS is still working to develop the withholding guidance, which is expected to be issued sometime this month. Once this happens, employers and payroll service providers will be encouraged to implement the new rules by February.

The new tax reform bill makes major changes to the U.S. tax code for both individuals and corporations, to include repealing the Affordable Care Act’s individual mandate. Although the Republicans were unsuccessful in repealing the Affordable Care Act, otherwise known as Obama Care, as a whole, under the new bill, non-insured people will no longer have to pay a tax penalty. This change, however, doesn’t go into effect until 2019. So, for 2018, the Obama Care penalty can still be assessed.

This bill represents the most significant tax changes in the U.S. in more than 30 years. Some of the key changes include: 

The number of brackets – seven – remained the same, but rates overall have come down. The top rate falls from 39.6% to 37% and the bottom rate remains at 10%, but covers twice the income compared to the previous brackets. For individuals, these lower rates are scheduled to expire in 2025, unless Congress extends them.

Standard Deduction and Exemptions 

Standard deduction and exemptions will change dramatically under the new tax rules. The standard deduction as the law currently exists is $13,000 for a couple filing jointly and $6,500 for single filers. This number will jump to $24,000 and $12,000 respectively.

The personal exemption, currently at $4,150 for 2018, will be repealed. However, the child tax credit gets a big boost. This currently sits at $1,000 and starts to phase out at $110,000 in income for couples and $75,000 in income for everyone else. Under the new law, however, the credit doubles to $2,000, $1,400 of which is a refundable tax credit. In addition, it doesn’t begin to phase out until $400,000 in income for couples and $200,000 for singles.

Itemized Deductions 

Some major changes are on the horizon for itemized deductions.  State and local taxes can still be itemized, but they are now capped at $10,000. This change is an attempt to address the uproar from states that levy big taxes on their citizens.

Interest on mortgages for primary and secondary homes is still deductible. However, the limit has come down from loans up to $1 million to loans up to $750,000.

Medical expenses in 2017 and 2018 are deductible to the extent that they exceed 7.5% of income…down from 10%.

Capital Gains Tax 

The current structure of the capital gains tax structure, which applies to things like stock sales and sales of other appreciated assets, won’t see much change. However, there are still a few key points to keep in mind.

For example, short-term capital gains are still taxed as ordinary income. Since the tax brackets applied to ordinary income have changed dramatically, as seen from chart above, short-term gains will likely be taxed at a different rate than they were.

In summary, Americans won’t see a significant difference in this spring’s tax return. The proposed cuts in the bill will be more pronounced when most people file in 2019.