Summary of the Tax Cuts and Jobs Act of 2017
Updated: Aug 4, 2020
This past weekend I was surprised to find I had accidentally purchased a book summary instead of the full book. This was my first experience with a book summary even though it is a popular trend. It appears almost any well-known book has a condensed summary version available. Needless to say, I finished the summary book in a fraction of the time the full book would take…
I think the vast majority of books are better in their original state, not summarized. However, in the case of the US tax law and new tax bill passed on December 22nd, I understand why one might want the summarized version.
The “Tax Cuts and Jobs Act of 2017” was intended to reform, lower, and simplify personal and corporate income taxes. This was the first major tax reform in over three decades and now that the dust has settled, it is a good time to look at the changes. Instead of having to spend your weekend pouring through all 400 pages of the tax bill, below is a summary and overview of personal and corporate tax changes.
The majority of Americans will see a personal tax cut due, in part, to each tax bracket being lowered by about 2% and the standard and child care deductions being doubled.
It is now estimated that over 90% of Americans will no longer need to itemize their deductions (30% of Americans itemized in 2017).
To offset those tax breaks and help simplify the code, the personal exemption has been eliminated and a cap placed on deducting state and local taxes.
According to the nonpartisan Tax Policy Center, as a result of the Tax Cuts and Jobs Act of 2017, personal after-tax incomes will rise on average by 2.2%. For a household making $49,000 – $86,000, that is an average tax cut of $930; households earning $86,000 – $149,000 will see an average cut of $1,800.
Lowers income tax rates – The act keeps all seven-income tax brackets and simply lowers the tax rate in each. Most employees are likely to already have seen this effect in their paycheck. However, this is not a permanent change as and these new rates are scheduled to expire in 2025 unless extended by Congress. Below is a chart of the new individual and married filing jointly tax brackets.
Doubles standard deduction – The standard deduction doubles to $12,000 for individual returns and $24,000 for married filing jointly.
Eliminates personal exemption – In 2017, if income requirements were met, taxpayers could claim a $4,050 deduction for themselves, spouses, and each qualifying dependent. This is now eliminated altogether.
Doubles child tax credits – This also doubles from $1,000 to $2,000 per child. The qualifying income limit for this increases to $400,000.
Caps state and local taxes – Only the first $10,000 of state of local taxes can be deducted (there was no previous cap).
Expands 529 Plans – Qualified distributions from 529 accounts are expanded to include private school expenses and tuition (k-12). This distribution is capped at $10,000 per year for k – 12 expenses.
Eliminates health insurance mandate – The health insurance mandate was removed, and taxpayers will not pay a penalty if they go without health insurance. This repeal will start in January 2019.
Corporate tax rates – The act lowers corporate tax rates to a flat rate of 21%. The highest tax bracket was previously 35. Unlike the individual tax cuts, these laws are permanent, meaning they will not expire in 2025. The intent was to encourage corporations to retain and expand business in the United States. Annually, over 300 billion dollars of corporate profits are sent overseas; this is estimated to reduce to 65 billion with the new changes.
Pass-through businesses – Qualified business that are considered pass-through entities, including limited liability companies and S corporations, can receive a 20% deduction on profits. Phase out for this begins at $315,000 for married filing jointly. This potentially is a large tax savings for those who own or can form a LLC or S corp.
Repatriation – Corporations have been amassing some $2.6 trillion cash in foreign countries. These funds can return to the United States with a one-time tax rate of 15.5% on cash or 8% on equipment.
According to the IRS, 90% of people will see more money in their paycheck in 2018. This is a great opportunity to use that extra money to achieve some of your family goals.
As always feel free to reach out to me with any questions,
Evan Werckenthien, CFP©
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Source: Experian, Federal Reserve