The recently signed tax reform bill will bring about the most substantial changes to the US tax code in decades. A summary of the major changes impacting individuals and families is listed below.
Adjustment of Personal Tax Brackets
Most rates at which income is taxed have been reduced. The previous brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% have been replaced with 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These reduced brackets will result in tax savings for the majority of taxpayers.
Higher Standard Deduction & Elimination of Personal Exemptions
Personal exemptions have been eliminated and the standard deduction has been doubled. The new standard deduction is $12,000 for single filers and $24,000 for married filers (indexed to inflation). These changes create higher thresholds for taxpayers looking to itemize deductions (mortgage interest, property taxes, charitable donations, etc.).
State and Local Income Tax (SALT) Cap on Itemized Deductions
Taxpayers will be capped at $10,000 in deductions for all income, property, and sales taxes paid at state and local levels. Previously, this deduction was unlimited. This change may have a substantial impact on taxpayers living in high income and property tax areas.
Child Tax Credit Increase and New Dependent Care Credit
The child tax credit has been doubled from $1000 to $2000 per child under age 17. A new “family credit” of $500 can be claimed for qualifying dependents such as parents or children in college.
Reduction in Corporate and Pass-Through Tax Rates
Corporate tax rates will be reduced from 35% to 21%. Also, pass-through businesses structured as sole proprietorships, partnerships, and S-Corporations will be able to deduct 20% of net income.
Increase in Federal Estate Tax Exemption
The federal estate tax exemption will increase to $11 million per person and $22 million per couple.
Speak with your financial planner or tax professional to determine how the new tax bill will impact your specific situation.