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An Introduction to the Tax Cuts and Jobs Act: Top 5 Changes That May Affect You

Business Owners Tax Planning

On December 21, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The Act provides for a number of significant changes that will affect individuals, businesses, trusts, and estates. While implementation of the law will take some time, there are a number of changes to the law worthy of your attention.  It will benefit you to be aware of the items detailed herein, but I recommend working with your CPA when making any determination as to how the law will specifically affect you, your family, or your business.  The following are what I believe to be the top 5 changes that will affect my clients during the coming years:  

  1. Tax Rate and Bracket Changes: Under the current tax law, individuals' taxable income is subject to tax brackets ranging from 0% to 39.6%. Under TCJA, individuals will be subject to tax rates ranging from 0% to 37%. In addition to the reduction of the top end tax rate, each tax bracket has increased in income limits. Businesses, especially pass through entities like LLCs, Partnerships, and S-Corps, will experience a significant change in the way taxes are computed. To simplify the changes, most business owners/partners will get up to a 20% reduction of income from those entities on their personal tax return. For C-Corporations, the top tax rate has been lowered from 35% down to 21%. Look for a more thorough explanation in a future post.

  2. Standard Deduction Increases/Elimination of Personal Exemptions: Under the TCJA, the standard deductions have been increased to $24,000 for married filing jointly taxpayers, $18,000 for head of household taxpayers, and $12,000 for all others. These deductions are significant increases from 2017 amounts of $12,700, $9,350, and $6,350, respectively. What this means is that a higher amount of income is tax-exempt as a result of the higher standard deduction that are applicable to all taxpayers. As a result of the higher standard deduction rates, TCJA eliminated the personal exemptions for each taxpayer, spouse, and dependent. The amount allowed for the 2017 tax season is $4,050.

  3. Alternative Minimum Tax (AMT): Unfortunately, the AMT was not excluded from TCJA for individual taxpayers, but it has been repealed for corporations. While AMT is still applicable for individual taxpayers, the thresholds for reaching and being subject to AMT have been increased. What exactly is the AMT? Originally implemented to prevent wealthy taxpayers from using loopholes to avoid paying taxes, the AMT attempts to ensure that taxpayers who claim certain tax benefits pay a minimum amount of tax.

  4. Itemized Deductions: This topic will be covered in-depth in a future blog post, but I wanted to include a list of itemized deductions that have been altered or repealed with TCJA. That list includes:
    - Mortgage Interest deduction
    - Home equity loans
    - State and local tax deductions
    - Casualty losses
    - Gambling losses
    - Charitable contributions
    - Medical Expenses
    - Miscellaneous Itemized Deductions

  5. Child Tax Credit: Previously, the tax law provided for a credit up to $1,000 per qualifying child. The credit itself is nonrefundable, meaning that it can only reduce the amount of tax due to zero. The TCJA has increased the amount of the credit to $2,000 per qualifying child, with a refundable amount up to $1,400. The bill has also created a nonrefundable credit of $500 for qualifying dependents who are not qualifying children.

Remember, these changes will not affect the tax return that you will be filing over the coming months.  You will see these changes reflected in your 2018 return, filed in early 2019.  However, some of these changes may affect the financial decisions you make during the year.   If you're concerned that an already complicated tax system has just been changed to create only more for you to learn, rest assured that we’ve been reading the law since it was passed and will continue to analyze the impacts that TCJA will have on all tax situations. 

Are you wondering what impact TCJA will have on you?  Call or email us and we’ll help you understand how it might affect you.