A big middle-class tax cut was one of the promises central to the campaign of President Trump. While political pundits are divided on whether the new legislation constitutes a middle-class benefit or a boon to businesses and the rich, all Americans will be affected in some way by the legislation.
Increase in Take-Home Pay
The immediate affect for most Americans will be to our paychecks. Initially, most everyone (the IRS estimates 90% of Americans) will see an increase in take-home pay, with the largest discount going to those in the highest income brackets. The law reduces the income tax rate for individuals. Starting this year (2018), the Act reduces the withholding from your pay.
Note that the tax cuts are set to expire in 2026, and some experts believe you will be paying more taxes incrementally during the years the Act is in effect.
Changes in Deductions
The new law doubles the standard deduction for all individual taxpayers and eliminates or changes the rules for many itemized deductions. As a result, it is believed that the vast majority of Americans will choose to take the standard deduction (currently, about 28 percent of tax filers itemize on their taxes, according to the Urban-Brookings Tax Policy Center).
Two changes to the itemized deductions stand out. The deduction for local property tax, state and local income and sales taxes (SALT) is now capped at $10,000. This will trouble those who live in states with especially high income tax, especially those in New York and California where such taxes are much higher than average. Elected officials in high tax states fear the cap will have chilling effect on their growth opportunities.
The new Act lowers the cap on mortgage interest deductions from home purchases of $1 million to $750,000 (the new cap only applies to new purchase mortgages, not existing ones). Additionally, the new Act eliminates the deduction for interest on home-equity debt, such as HELOCs (home equity line of credits). 1
Wealth Transfers and Taxes
The estate tax now allows an exemption on wealth transfers of up to $10 million for an individual, double what it was in 2017. The exemption is indexed to inflation after 2011, which means an even larger exemption in this year. The exemption doubles for couples.
Health Care and Taxes
The Act repeals the tax penalty on individuals without health insurance that was part of the Affordable Care Act. However, those who have purchased or currently enjoy high-end health insurance policies can deduct some of the cost. Some economic analysts believe that eliminating the individual mandate will cause health care premiums to rise. While most Americans have health insurance through an employer, those who must buy heath care on the open market could find insurance to become more expensive in a few years.
Corporate and Business Taxes
The biggest change for businesses to come out of the Tax Cuts and Jobs Act (TCJA) is the establishment of a flat 21% tax rate for corporations.
Some small businesses will receive a break as well. Small businesses where the profits “pass through” to the owner were used to be taxed at the individual tax rate. So if your business was doing well, your profits could be taxed at up to 40%. Under the TCJA, the maximum tax rate is now 29.6%.
The Bottom Line
Will the new tax law benefit you, and if so, how much? That depends on what you currently earn, where you live, and whom you ask. Conservative leaning think tanks like the Brookings Institute suggests that the economy will benefit and that after the income tax cuts expire, the deficit will drop significantly, offering a boom to stocks and jobs. On the other side, the belief is that the short-term tax savings will end up costing the middle-class in the long run, and raise the deficit such that no economic boom can make up for it.
Please note, the information in this article is for informative purposes only. It is not intended to replace the services of a qualified tax professional such as a CPA. Should you have any questions regarding this information, please, contact your tax professional. If you do not have a tax professional, we can make an introduction for you.