If you wonder how the new tax bill will affect your tax and financial positions going forward, it is official! On Friday, Dec 22, President Donald Trump signed the bill at 11am before leaving for his Christmas break. The Tax Cuts and Jobs Act has passed. A bill that will affect the entire country, whether rich or poor. I bet you are thinking how this tax bill will affect you and your business. Below, we provide you a summary of the points in this bill so you will be ready to face these changes!
For individuals, there will still be seven tax brackets, just like in the current law. However, rates have been lowered for each bracket in the new bill. Currently, the seven tax brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The bill has the new rates at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. This means that your taxes will go down overall.
In addition, the standard deduction will increase through 2025 from $13,600 to $24,000 for married taxpayers filing jointly, $9,350 to $18,000 for heads of households, and $6,300 to $12,000 for all other individuals. However, there will be no more personal exemptions allowed. For those who are not itemizing, you will see a tax decrease but those with larger families might be a tax hike.
For those with big families, the child tax credit will double, from $1,000 to $2,000 to compensate for the loss of the personal exemption. In addition, up to $1,400 will be refunded to you if your tax is lower than this credit.
Unfortunately, many itemized deductions have been reduced or eliminated. First, you are only allowed to deduct mortgage interest up to the mortgage taken, which is now $750k instead of $1 million. Second, only up to $10k of state, local, and property tax is deductible. Third, the only casualty losses allowed now are those declared a disaster by President Trump, such as Hurricane Harvey. All miscellaneous deductions are disallowed, such as unreimbursed employee expenses. However, the bill has allowed more medical expenses to be deducted if they are over the threshold of 7.5% of your AGI, up from 10% of AGI.
In return for the reduction of itemized deductions, you will see less AMT or even gone from your taxes! AMT now only affects those with over $500k of income for singles and $1 million for married couples. Previously, you might be subject to AMT if you have over $70,300 for singles and $109,400 for married couples. Lastly, there will no penalties for those who have no health coverage, starting in 2019.
For those who have businesses, celebrate if you are a sole proprietor, partnership or S corporation because you can now qualify for some or all the new 20% deduction. To enjoy the full deduction, you first must have qualified business income. In addition, you will need to earn 315,000 or less for married couple and 157,500 or less for single filer.
Business owners who purchase property and equipment will receive a lot of benefits with this tax bill. 100% of eligible property, including property that is bought used, is deductible up until 2022. The Section 179 limitation has doubled from $500k to $1 million.
There are some limitations to what is deductible for businesses. Business interest deductions are now limited to 30% of the adjusted taxable income. In return, any disallowed interest deduction can be carried forward to future years. Entertainment expenses have now been disallowed while meals are still allowed. NOLs are now limited to 80% of taxable income and are not allowed to be carried back except for farming businesses. The losses can be carried forward indefinitely. Overall, businesses will benefit from this tax bill.
Confused or have more questions? As always, you can call my office at 832-795-9612 to schedule for a tax meeting if you have additional concerns. We are here to help!