The New IRS Code is Complex
Not since 1986 have we seen such a massive overhauling of the U.S. tax laws. The House and Senate went into a fury of negotiations and debate this fall and rolled out a proposal that President Trump signed into law with just a few days left in 2017. Corporations are cheering as the corporate tax rate nosedives from 35% to 21% and is written as a “permanent” change.
For individuals, it may not be as clear-cut who the winners and losers are. Most may see some reduction in taxes, but how much is the question. A small minority of taxpayers may experience a slight increase. Also, it is important to note that the individual side of the tax law is not permanent, as the corporate reductions are. There will be a phase-out of the individual cuts in 2025.
If you were expecting to “file your taxes on a postcard,” you may be disappointed. That may be true for some individuals that will no longer be itemizing their deductions, but it won’t be the case for most individuals.
So what are the major changes that individuals should know about? Below is a highlight list of changes that may apply to the majority of us. You can also access a 2-page PDF that summarizes all the Key Financial Data for 2018.
But keep in mind that there are many more details and the only way to know for sure how the changes affect your bottom line tax liability is to work closely with your tax preparer or CPA. I suggest making your appointments early as it is going to be a very hectic tax season!
Highlights of the 2018 Tax Changes
- The standard deduction increases for singles to $12,000
- The standard deduction increases for marrieds to $24,000
- Child Tax Credit is increased to $2,000 (from $1,000)
- Personal Exemption (formerly $4,150) is eliminated
- There is now a cap on state, local and property tax deduction of $10,000
- 401(k) contribution limit is increased to $18,500 (plus 50+ catch-up of $1,000)
- Traditional IRA contribution limit remains unchanged at $5,500 (plus 50+ catch-up of $6,000)
- 529 College Savings Plan is now expanded to include private or religious K-12
- The Alternative Minimum Tax remains, but with different exemptions. Seek out a tax professional on this one.
- The Estate Tax remains but the exemptions double to $11.2M for singles and $22.4M for couples
- It is also worth noting that starting in 2019, the mandate for health insurance goes away
- 2018 Tax Rate Schedule:
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The Congressional intention and hope for this new tax law are that the corporate tax reductions will help accelerate growth in what has been very slow recovery from the Great Recession. Some estimates indicate that U.S. corporations have about $2 trillion in overseas accounts, largely to avoid the high U.S. corporate tax rates. Some of those dollars could now find their way back to the U.S. to help fuel further growth.
The theory is that if corporations spend more on people, processes, plants, and tools, then productivity and profits will increase fueling even more investment and more growth. The White House is hoping our sluggish less-than-2% growth in GDP will become 4% growth. Most economists say the growth is more likely to be in the 2.5% range.
On a positive note, we have already seen some large firms such as AT&T and Comcast announce employee bonuses that they are attributing to the corporate tax change.
Time will tell how this economic theory and tax restructuring will play out. It will be interesting to watch if wages are affected, not just periodic bonuses.
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