Trump’s Tax Plan and the Major Changes

Trump’s Tax Plan and the Major Changes

On December 20, 2017 the House and the Senate both passed the final version of the Tax Cuts and Jobs Act. The last step is for President to Trump to sign the bill and all signs point to the fact that he will, after all it is “his” Tax Plan. The President wanted to sign it before Christmas, but it will take a waiver for that to happen.

Many companies are urging him to wait until January, given the enormous amount of reporting they would have to do at the last minute. Companies must show the impact of new tax law in the quarter in which it was passed when they release that quarter’s earnings. Therefore if signed into law before Christmas, companies would have a new law to understand, interpret and show the financial impact all before fourth quarter earnings go out.

From a broad strokes perspective, the individual tax brackets mostly dropped 2-3% each, the standard deduction was doubled, and personal exemptions were eliminated. Due to the Byrd Rule, the individual tax cuts must expire within 10 years, so all the changes were put into play with an expiration date of 2025. The final bill also cuts the corporate tax rate from 35% to 21% with no expiration date.

Individual Tax Brackets and Deductions

The final tax bill keeps the 7 brackets (one version earlier only had 4) but it lowers the tax rates until 2026 when the changes revert back to the current plan.

The tax bill will eradicate many of the normal itemized deductions found on Schedule A. However, it does keep deductions for charitable donations, property taxes, retirement savings and mortgage interest. Currently the mortgage interest deduction is limited to interest paid on the first $1 million of the acquisition price and that has been lowered to $750k. Taxpayers will be allowed to deduct up to $10k of state and local taxes, however, they must choose between property taxes and income or sales tax. Tax payers with more expensive medical costs will receive a break from the floor currently being 10% of the adjusted gross income and the bill lowers the floor to 7.5%. Don’t be overly concerned about losing itemized deductions from Schedule A, given that the standard deduction has been doubled. Basically meaning that for a married couple filing jointly to use the itemized deductions, then their deductions (medical, interest, taxes, charity, etc..) will need to be higher than the standard deduction of $24k.

This bill repeals Obamacare Tax on those that do not have health insurance. Currently that is set to be 2.5% of your income with set maximum penalty levels. This in effect goes away and individuals aren’t penalized for not having health insurance. Assuming some individuals drop their coverage as a result, the government will have savings from supplementing those policies.

Student loan interest deduction is kept in the plan, but personal exemptions were kicked out. Currently, one can deduct $4,150 times the number of people claimed on the return. So a family of 4 would currently be able to deduct $16,600, but losing this is somewhat offset by the doubling of the standard deduction. Depending on your situation it may result in less deductions and more taxes paid.

The current child tax credit is $1,000 and the Tax Bill raises that to $2,000 with $1,400 of that being refundable if you are eligible. Also the new plan includes a $500 credit for non-child dependents, such as elderly parents. The new tax plan also allows the use of 529 college savings plans to fund private and religious K-12 programs as well as home schooled children.

Alternative Minimum Tax is often overlooked until you end up having to pay it and then it becomes a nightmare. Basically if you are using several deductions to lower your tax liability the AMT is calculated and often times you end up losing some of the deductions and are forced to pay a larger tax bill. The tax remains in the bill, but fortunately the exemptions are increased.

Business Taxes and Deductions

The final tax bill lowers the corporate tax rate from 35% down to 21% and raises the standard deduction to 20% for pass-through businesses. The pass-through deductions are limited once the income tops $157k for singles and $315k for joint. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations that essentially pass the earnings through to another entity or individual.

The bill also limits the interest expense deduction to 30% of income. Furthermore, the bill allows businesses to deduct the costs of depreciable assets (i.e., property, plant and equipment) in one year instead of the normal depreciation over the estimated useful life of the asset.

The new Tax Bill does eliminate corporate AMT, which should save some companies a pile of cash. This new bill also allows the repatriation of foreign earnings/cash. The companies will pay a flat one time 15.5% tax on cash and 8% on equipment. It has been said that over $2.6 trillion is held in foreign countries by corporations simply because it is too expensive, under current tax law, to bring back to the States.

The new bill cuts the deduction of some research programs and cuts taxes on alcohol. It does retain the tax credit for eco-friendly vehicles and farms. If oil would get above $70 a barrel, then drilling in the Arctic National Wildlife Refuge could have a profitable go since the new bill now allows that activity.

What does all this mean

It seems since the business taxes are in fact permanent, or at least until another policy is put into place, the new plan probably helps businesses a little more than individuals in the long run, but time will tell.

Does everyone get a tax break at the beginning, well maybe? It really depends on your situation, the lower tax rates, may not totally offset the loss of deductions for some taxpayers. Again it all depends on your unique situation, but most Americans can probably expect a slight tax break.

The government may be on the losing end of this new Tax Bill. According to the CBO, the tax cuts themselves would cost $1.47 trillion. The bill increases the deficit by almost $448 billion over the next 10 years, factoring in the offset by $700 billion in growth and savings from eliminating the ACA mandate.

For most of the taxpayers, you have an entire year to figure exactly how it impacts your wallet.

Until next time.....


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