The Tax Cuts and Jobs Act of 2017 hasn’t been formally ratified by the U.S. House and Senate, but with votes scheduled for the House this afternoon and the Senate late tonight, the bill will likely be sent to the President’s desk by tomorrow morning. As you probably know, the House and Senate versions were somewhat different. What does the new bill look like now?
The new bill maintains seven different tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see their bracket go down by one to four percentage points, with the higher reductions going to people with higher income, and the new tax brackets will be indexed for inflation, meaning that the “real” income brackets will remain approximately the same from year to year.
The new brackets break down like this:
Income $0-$9,525 – 10% of taxable income
$9,526-$38,700 – $952.50 + 12% of the amount over $9,526
$38,701-$82,500 – $4,453 + 22% of the amount over $38,700
$82,501-$157,500 – $14,089.50 + 24% of the amount over $82,500
$157, 501-$200,000 – $32,089.50 + 32% of the amount over $157,500
$200,001-$500,000 – 45,689.50 + 35% of the amount over $200,000
$500,001+ – $150,689.50 + 37% of the amount over $500,000
Married Filing Jointly Taxpayers
Income $0-$19,050 – 10% of taxable income
$19,051-$77,400 – $1,905 + 12% of the amount over $19,050
$77,401-$165,000 – $8,907 + 22% of the amount over $77,400
$165,001-$315,000 – $28,179 + 24% of the amount over $165,000
$315,001-$400,000 – $64,179 + 32% of the amount over $315,000
$400,001-$600,000 – $91,379 + 35% of the amount over $400,000
$600,000+ – $161,379 + 37% of the amount over $600,000
Taxes for trusts and estates were also changed to:
$0-$2,550 – 10% of taxable income
$2,551-$9,150 – $255 + 24% of the amount over $2,550
$9,151-$12,500 – $1,839 + 35% of the amount over $9,150
$12,501+ – $3,011.50 + 37% of the amount over $12,500
Other provisions of the bill include: a basically doubled standard deduction to $12,000 (single) or $24,000 (joint), $18,000 (head of household), and in an interesting provision, persons who are over 65, blind or disabled can add $1,300 to their standard deduction. The bill calls for no personal exemptions for 2018, and the Pease limitation, a gradual phase out of itemized deductions as taxpayers reached higher income brackets, has been eliminated.
Despite the hopes of many taxpayers, the dreaded alternative minimum tax (AMT), remains in the bill. The individual exemption amount is $70,300; for joint filers it’s $109,400. But for the first time, the AMT exemption amounts will be indexed to inflation.
Interestingly, the new tax bill retains the old capital gains tax brackets—based on the prior brackets. The 0% capital gains rate will be in place for individuals with $38,600 or less in income ($77,200 for joint filers), and the 15% rate will apply to individuals earning between $38,600 and $452,400 (between $77,400 and $479,000 for joint filers). Above those amounts, capital gains and qualified dividends will be taxed at a 20% rate.
For many taxpayers who itemize deductions, the adjusted gross income number will be higher under the new tax plan, because many itemized deductions have been reduced or eliminated. Among them: there will be a $10,000 limit on the deduction for state and local income tax and property tax payments. Before you rush to write a check to the state or your local government, know that a provision in the bill states that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017, and instead will be treated as having been paid at the end of calendar year 2018.
The mortgage deduction will be limited to $750,000 of principal (down from a current $1 million limit); any mortgage payments on amounts above that limit will not be deductible. However, the charitable contribution deduction limit will rise from 50% of a person’s adjusted gross income to 60% under the new bill.
What about estate taxes? The bill doubles the estate tax exemption from, currently, $5.6 million (projected 2018) to $11.2 million; $22.4 million for couples. Meanwhile, Congress maintained the step-up in basis, which means that people who inherit low-basis stock will see the embedded capital gains go away upon receipt.
Public “C” Corporations saw their highest marginal tax rate drop from 35% to 21%, the largest one-time rate cut in U.S. history for the nation’s largest companies, and pass-through entities like partnerships, S corporations, limited liability companies and sole proprietorships will receive a 20% deduction on taxes for “qualified business income,” which explicitly does NOT include wages or investment income.
As things stand today, all of these provisions are due to “sunset” after the year 2025, at which point the entire tax regime will revert to what we have now.