The new “Tax Cuts and Jobs Act” that was signed into law late last year is the most sweeping tax reform in decades. Unlike most tax law changes, this act affects virtually everyone who files a tax return.
For most taxpayers, some of the provisions will prove helpful, while others will be detrimental. It is this mixture of “good” and “bad” that makes it so hard for people to determine whether or not they’re happy about this legislation.
“Losers”: Taxpayers who are in the following situations may find that the new law not to their liking:
- Those who typically have high real estate taxes and high state taxes will find that in the future they will be limited to $10,000 for the total of all of those deductions. Residents of states like New York and California are particularly upset with this provision.
- Single filers who typically have itemized deductions in the $9,000 – $14,000 range will likely be hurt more by the loss of personal exemptions than helped by the increase in the standard deduction. Taxpayers filing jointly with itemized deductions in the $18,000 – $28,000 range will find the same problem.
- Individuals who have high unreimbursed job expenses, such as those who travel a lot on company business but are not reimbursed by their employer will find that they can no longer deduct those expenses on their tax return.
“Winners”: Most taxpayers will benefit by the new law, particularly those who have the following situations:
- Those who typically use the standard deduction. The standard deduction has almost doubled.
- Parents who have children under the age of 17. The Child Tax Credit has doubled.
- Corporations will see their tax rate reduced to 21%, which currently can be as high as 35%.
- Small business owners will be able to take a tax deduction of up to $40,000.
Here are some of the changes that will tend to help taxpayers:
- The standard deductions have almost doubled.
- 5 of the 7 tax brackets have been reduced. The 15% bracket is now 12%; the 25% to 22%; the 28% to 24%; the 33% to 32% and the 39.6% to 37%. The 10% and 35% remain unchanged.
- The Child Tax Credit has been doubled (from $1,000 to $2,000 per qualifying child).
- A new Family Credit has been added for dependents who do not qualify for the Child Tax Credit. This credit amounts to $500 for each such dependent.
- Small business owners (sole proprietors, partnerships & S-corporations) may qualify for up to $40,000 of a new Qualified Business Income deduction.
- The corporate tax rate has been reduced to a flat 21%. It was a progressive structure that ranged from 15% to 35%.
- Itemized deductions will no longer be “phased-out” for higher income earners.
- The threshold for deducting medical and dental expenses has been lowered from 10% of AGI to 7.5%.
- 529 Plans can now be used to pay for elementary and secondary education expenses instead of just “higher education” expenses.
- The penalty for not having health insurance has been eliminated starting in 2019.
On the other hand, here are some of the changes that will tend to “hurt” taxpayers:
- The personal exemption has been eliminated. This exemption reduced the taxable income by $4,050 for each taxpayer and dependent listed on the tax return.
- Deductions for taxes such as state income or sales tax, real estate tax and personal property tax have been capped at $10,000.
- Unreimbursed employee expenses such as travel, job education, clothing, tools and union dues will no longer be deductible. Neither will tax preparation fees or investment related fees.
- The deduction for moving expenses has been eliminated except for members of the Armed Forces on active duty or their spouse or dependents.
- Business entertainment expense deduction has been eliminated.
Overall, extensive modeling suggests that “winners” will outnumber “losers” by roughly 9:1. I certainly hope you’ll be among the winners!