Budgets, featured, Income Taxes

Trump Tax Bill and You

As 2017 comes to a close, President Trump and his administration are making changes that will affect your tax returns when filed in 2018. Many are wondering how these tax changes will affect them, well here’s a list of the changes and how you and your business, family, and friends may be affected:

A. Personal Tax Changes

  I. Individual Taxes:

  •   Individual tax as of 2017 had seven rates, however, under the new tax bill such rates are diminished to four levels ranging from 12% – 39.6%. In other words, each level of earnings will experience a 2% tax hike.

 II. Married filing Joint (MFJ) Taxes:

  • $0 to $89,999: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%.  The new tax bracket increases taxes for such couples and households.
  • $90,000 to $259,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Couples and households under this income bracket experience a decrease in their taxes.
  • $260,000 to $999,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. The effect of the new tax bill varies for these couples based on their income and tax bracket of previous tax bill.
  • $1,000,000 and higher: 39.6% bracket. These couples would realize a tax decrease from current rate.

  III. Married filing Separate (MFS) Taxes:

  • $0 to $44,999: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. Many would experience a decrease in their taxes.
  • $45,000 to $129,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Everyone experiences a decrease in taxes.
  • $130,000 to $499,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. Tax experience varies based on income.
  • $500,000 and higher: 39.6% bracket. All filers receive a tax break under new law.

  IV. Heads of household (HOH):

  • $0 to $67,499: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. Minor tax increases for some filers, however, major tax decrease for others.
  • $67,500 to $199,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Similar to previous income bracket, some decreases and some increases.
  • $200,000 to $499,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. As previous, some increases, but major decreases depending on previous income and tax bracket.
  • $500,000 and higher: 39.6% bracket. All filers experience a decrease in taxes.

  V. Singles

  • $0 to $44,999: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. Most filers under this income bracket experience tax cut.
  • $45,000 to $199,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Most filers experience tax break.
  • $200,000 to $499,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. Certain tax filers would experience an increase, while most experience a decrease.
  • $500,000 and higher: 39.6% bracket. All tax filers experience a decrease.

Overview:

Overall, this new tax bill is beneficial to higher earners, while those who earn less in each bracket experience an increase in their income taxes.

B. Tax rates on long-term capital gains and dividends

Overall, no change from previous tax bill.

C. Personal and dependent exemptions and standard deductions

  •       The new tax bill eliminates personal and dependent exemptions.
  •       The new tax bill however, increases standard deductions as follows:
    • MFJ increased to $24,400 (was $13K)
    • HOH increased to $18,300 (was $9,550)
    • All others increased to $12,200 (was $6,500)

Overview: Changes in new tax bill varies depending on previous years exemptions and itemized deductions, some filers may see a loss, while other see an increase in benefits.

D. Other Deductions:

  • Only allowable itemized deductions will be in home mortgage interest, charitable contributions, and state and local property taxes.
    • Maximum property tax write-off will be $10k ($5K MFS)
  • Foreign property taxes will not be deductible.
  • Property purchased as of November 2, 2017:
    • Interest deduction can only be taken up to $500k of property value
      • previous deduction of interest on $100k home equity on loan is removed by current administration
    • The maximum deductible cash contribution to an IRS-approved public charity would be increased from 50% of adjusted gross income to 60%.
    • The itemized deductions for medical expenses, personal casualty losses, tax preparation fees, and employee business expenses not reimbursed by employer would be eliminated.
    • Alimony and moving expenses is to be eliminated.
    • Alternative Minimum Tax is eliminated.
    • No change to retirement fund accounts.
  • Child Tax Credit:
    • Increase from $1k to $1,600
      • MFJ phaseout is $230k (was $110k)
      • Other filing status phaseout is $110k (was $75K)
      • A new $300 family tax credit would be allowed for the taxpayer ($600 for married joint-filing couples), and a $300 family tax credit would be allowed for certain dependents who are not qualifying children.
    • Child Tax Credit Overview: Filers would see and increase in credit to offset elimination of dependent exemption elimination.
    • College Credit:
      • American Opportunity Tax Credit which can be worth up to $2,500 per year per qualifying student remains unchanged, but an additional year is added to the credit (now five (5)  instead of the allowed four (4) in current bill)
      • The current-law Lifetime Learning Tax Credit for other post- secondary education expenses, worth up to $2,000 per household per year, would be eliminated.
      • Contributions to Coverdell Education Savings Accounts would be eliminated for 2018 and beyond. Current law allows annual contributions of up to $2,000 to these accounts. Balances in Coverdell accounts could be rolled over to Section 529 plan accounts.
      •  Up to $10,000 of annual tax-free withdrawals could be taken from Section 529 accounts for elementary and secondary school tuition, including tuition for private and religious schools.
      • Tax-free withdrawals could be taken from 529 accounts to cover books, supplies and equipment to participate in a registered apprentice program.
      • The existing deduction for up to $2,500 of annual student loan interest would be eliminated.
      •  The existing tax-free treatment for U.S. savings bond interest used for qualifying higher-education expenses would be eliminated.
      • The existing tax-free treatment for tuition discounts offered to employees of educational institutions and their spouses and dependent children would be eliminated.
      • Under current law, an employer educational assistance program can deliver up to $5,250 in annual tax-free benefits. The GOP bill would eliminate this break.
      •  Finally, the discharge of a student loan balance due to the student’s death or permanent disability would be tax-free.

E. Home sale gain exclusion rules tightened

Under current law, you can exclude (pay no federal income tax on) up to $250,000 of gain from selling your principal residence or up to $500,000 if you are a married joint-filer. You must have owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date.

F. Adoption credit — and plug-in electric vehicle credits — eliminated

  •  The GOP bill would eliminate the adoption credit (credit was $13,840)
  • Credit for purchasing a new plug-in electric vehicle eliminated (was $7,500)

G. Some tax-free employer-provided benefits eliminated

  • Tax-free employer dependent care assistance programs, which can deliver up to $5,000 a year under current law.
  • Tax-free employer-provided adoption assistance programs, which could deliver up to $13,840 for 2018 under current law.
  • Tax-free employer moving expenses allowances.

H. Estate & Gift Tax Changes:

  • Changes to estate and gift taxes and generation skipping tax
    • Under current law, there is a unified federal estate and gift tax exemption, which is scheduled to be $5.6 million for 2018. Estate values and cumulative gifts that exceed the exemption are taxed at 40%. The 40% generation skipping transfer tax (GSTT) hits gifts or bequests made to beneficiaries who are more than one generation below the giver and that exceed the GSTT exemption (also scheduled to be $5.6 million for 2018). The GOP bill would increase the exemptions for these two taxes to $10 million for 2018-2023 and would then repeal both taxes for 2024 and beyond.
      • For 2024 and beyond, there would be a $10 million exemption for gifts. Excess gifts would be taxed at 35%.

Overall, tax payers and return filers will have to compare and contrast their previous tax payments with the changes in the new tax bill. For some, there are great benefits, while for others the changes are noticeable. In the end, the new tax season is bound to be eventful for tax professionals and tax payers alike.

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