The new tax bill is upon us. The tax code incurred many changes; those changes are somewhat confusing to figure out how as well as determining how much you’re affected. Here is a summary of the changes to income taxes, deductions, and business taxes. Please note: the individual changes expire at the end of 2025 unless extended or made permanent, while the corporate tax changes are permanent.
The tax bill maintains the same number of tax brackets, but lowers the rates for each bracket. These new rates revert to the 2017 rates in 2026 unless the government chooses to extends the cuts. The old and new tax brackets are as follows;
The standard deduction nearly doubles for single and joint filers, jumping to $12,000 and $24,000, respectively as well as the decision to eliminate personal exemptions. Common itemized deductions have been either eliminated or limited. Deductions on mortgage interest are eligible for the first $750,000 of the loan, and homeowners can no longer deduct interest on home equity lines of credit. Medical expense deductions have expanded, as well as the repeal of the Obamacare tax if an individual does not have insurance. Parents can now open a 529 account to send their children to private or religious school.
Deductions for state and local taxes is now capped at $10,000. This includes property taxes. For example, if you pay a combined $20,000 in property taxes and state income taxes, you can only deduct half of that if you itemize your deductions. Homeowners can only prepay their 2018 property taxes in 2017 if the tax assessment for 2018 occured in 2017.
The tax bill lowers the corporate tax rate from 35 percent to 21 percent. This change is permanent. Pass-through businesses are now only taxed on 80 percent of earnings up to $157,500 for singles and $315,000 for joint filers. This deduction ends after 2025. Pass-through businesses include sole proprietorship, partnerships, limited liability companies, S corporations, real estate companies, hedge funds, and private equity funds.
What does all this mean? The clear majority of taxpayers will take the standard deduction. Homeowners and those living in states with high local taxes are the most affected. The reason being three of the major deductions (mortgage interest, property and state taxes) are less likely to make a difference on their tax bill with a much higher standard deduction and caps on how much an individual can deduct.
Businesses benefit more from the tax reform than individuals. Corporate tax rates are permanent, while the individual tax cuts are currently set to expire at the end of 2025 thus limiting the effect of the new tax bill from adding to the national debt. Essentially meaning, individuals may experience higher taxes in 2026.