This is NOT a political piece, and it in no way endorses or supports any political candidates. I am registered as an independent, and I did not vote for either of the primary candidates in the 2016 election. I will not respond to any political questions or inquiries, only inquiries related to the piece.
Since my practice has been focused on advanced tax planning, I have had many inquiries by clients, friends and colleagues as to how the Tax Cut and Jobs Act will affect them. There is one thing I can say confidently, and that I believe to be unbiased; this tax bill will benefit most Americans. That is, if you consider paying less in taxes and increasing deductions for the clear majority of Americans, to be a benefit.
The only tax bracket that doesn’t see a decrease in federal income tax, is the lowest tax bracket. Which is those who file single making less than $9,526 a year or those who file jointly making less than $19,051. Before anyone thinks the TCJA is punishing impoverished people, consider the increase in the standard deduction. The standard deduction increased from $6,350 to $12,000 for those filing single and increased from $12,700 to $24,000 for those filing jointly, which means that people living below the federal poverty level will pay no federal income tax. 70% of Americans currently take the standard deduction and it’s anticipated to increase to 94% under the TCJA.
See the chart below to see how each tax bracket is affected.
Income Tax Rate
Income Levels for Those Filing As:
The new bill eliminates personal exemptions. Before the Act, tax payers deducted the $4,150 for each person claimed. So, families with many children may pay higher taxes despite the increase in the standard deduction. However, families with adult dependents (special needs individuals and the elderly) will get a $500 credit per person. The child and elder care tax credit also increase from $1,000 – $2,000.
The act eliminates most itemized deductions. Those removed outright are; alimony payments, home equity credit lines and moving expenses (except for military). Many others, such as the deduction for state and local taxes, or mortgage interest are limited. However, this will only affect you if you’re paying more than $10,000 in state and/or local tax and if you have a mortgage for more than $750,000 (Mortgages from 2017 and earlier are grandfathered in and not affected). This change is primarily going to affect those living in high tax and property value states like New York, New Jersey and California.
The Act also expands medical deductions. It allows tax payers to deduct medical expenses that are 7.5% or more of income. Before the bill, the cutoff was 10% for those born after 1952. This should benefit people with chronic/critical illnesses and medical conditions, and families with children who have special needs.
The TCJA does repeal the "Obamacare" tax on those without health insurance, but not until this year (2019). So if you just hate having health insurance, you can drop your coverage without penalty, but I wouldn't recommend it. If you don’t have health insurance, I'd recommend getting health insurance. The “Obamacare exchange” (www.healthcare.gov) is still up and running, and there are affordable plans available on the exchange. We also have an in house healthcare specialist who can give you some insight to both individual and business healthcare plans.
If you're concerned about the Alternative Minimum Tax, don’t worry, the TCJA kept it. It did however increase it from $54,300 to $70,300 for singles and from $84,500 to $109,400 for those filing jointly.
The Act keeps deductions for charitable giving, which is still limited to a max deduction of 50% of your income. It also keeps the deductions for retirement savings and interest on student loans. These three areas of the tax code remain unchanged.
The other area of the tax code that almost remains unchanged is the capital gains tax. Short term capital gains will still be taxed as ordinary income, and the long term capital gains tax brackets of 0% for low income earners, 15% for middle income earners, and 20% for top earners stays in place. The 3.8 % net investment income tax that applies to certain high income earners will also stay in place. There were some changes to the income brackets themselves, see the below chart.
Long-Term Capital Gains Rate
Married Filing Jointly
Head of Household
Married Filing Separately
Up to $38,600
Up to $77,200
Up to $51,700
Up to $38,600
Before you decide to change or keep your stance, don’t run out and buy the #MAGA hat just yet. The rumors are true, this bill does help many if not all businesses and the very wealthy. And the corporate cuts, they’re permanent, all the individual cuts are temporary and expire in 2025. The very wealthy should also benefit from increasing the estate tax exemption to twice that of what it was in 2016. However, that is not what this piece is about, we are discussing how this bill will affect most Americans. So we won’t get into the business and estate tax side of the TCJA.
To summarize; if you’re single and your taxable income is less than $9,526 ($19,051 for those filing jointly) you get nothing other than the increase in the standard deduction. Which means you potentially will pay no federal income tax. Everyone else who is not paying more than $10,000 in state or local taxes, has not gone out and obtained a mortgage for more than $750,000, and does not have more than 3 children should see a benefit from the TCJA.
If you still have questions or concerns about how the TCJA might affect you, we are happy to answer any questions or give you a complimentary review. You can reach out to our office on the contact us link on our website.
Data source: Tax Cut and Jobs Act