What Does The New Tax Law Mean For You?
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Since then many of our clients and friends have asked us details about what this new tax law means for them. While very few tax returns are ever the same, there are some generalities we can make regarding the major provisions of the reform. Nearly every tax payer will be impacted by these changes. As with all new tax law, some will pay less and some will pay more. This new tax law just shifts that burden.
Do the tax brackets change and how?
The brackets for individuals are wider, meaning taxpayers will be able to squeeze more taxable income into their respective bracket without jumping to the next higher tax rate. Additionally, the rates are lower. For example, a couple with taxable income of $150,000 will pay taxes in the 10%, 12% and 22% brackets. Prior to 2018, those rates are 10%, 15% and 25%. The result for this couple is about $4,000 less tax under the new rates and brackets.
What are the standard deductions, and what has changed?
The new standard deduction amounts are $12,000 (singles), $18,000 (head of household) and $24,000 (married). Those amounts are nearly double that allowed prior to 2018. If “simplification” was the goal, I suppose this could be one of the few areas it was achieved. A couple that itemized their real estate taxes, mortgage interest, charity and such in the past can now take a standard deduction if those deductions totaled less than $24,000. That seems simpler, however, California has not conformed to the federal law. For now, it appears those couples will continue to track those deductions, thus nullifying any simplification.
How does it affect retired couples with no kids?
Well, we have to consider the income level and deductions for the specific couple. Generally-speaking a retired couple with few deductions would double their standard deduction from roughly $12,000 to $24,000. In a 22% bracket, that will save them about $2,500. If the couple has significant deductions and does not use the standard deduction, they could still benefit from the lower rates and wider brackets.
How does it affect married couples with 3-4 kids?
Once again, the scenario is dependent on income level and deductions. A couple with four children will lose nearly $24,000 in dependency deductions. However, if income is less than $400,000, they should see a child tax credit of $8,000. If this couple’s tax bracket is 32% or less, they would likely come out ahead.
How does it affect business owners?
I think business owners have done well under the new law. The most popular provision seems to be the pass-through deduction on qualified business income. This generally refers to sole proprietors, S-corporations and LLCs. For business owners with income under $315,000, they could potentially take a $63,000 deduction to offset that income. The rules, limits and phase-outs are extremely complex. The IRS should issue regulations in late spring or summer providing examples of how Congress intended those limits and phase-outs to apply. Business owners with income over $315,000 may still see some deduction. Those with income over $415,000 and engaged in a “specified service business” such as health, law, financial services and most consulting engagements will likely not get the pass-through deduction. However, those business owners may still benefit from the lower rates and wider brackets, as well as from other business tax changes to depreciation and auto deductions.
You can read additional information at The New Tax Law’s Really, Really Big Postcard and Why The Pessimists Are Wrong About The New U.S. Tax Law.
Thank you for your continued business!