On December 22, 2017, President Trump signed into law The Tax Cuts and Jobs Act of 2017 (“TCJA”). The TCJA is the most dramatic change to the tax code in the past 30 years and is effective beginning in 2018. The modifications and changes to the tax code are vast. Below are several important changes that will likely impact our clients – individuals and small businesses.
Reduced Tax Rates and Lower Brackets
The tax rates have been reduced slightly under the TCJA. Additionally, the tax brackets were lowered so that a greater amount of income is taxed at lower rates. These changes, of course, do not mean that you will actually pay less in tax, as there have also been substantial changes to allowable deductions, exemptions and other areas that impact the total tax paid by taxpayers.
Increased Standard Deduction and Elimination of Personal Exemptions
The standard deduction was doubled under the TCJA whereby the new amounts are $12,000 for individuals and $24,000 for married couples. These higher amounts will remove the necessity for many taxpayers to itemize deductions. This increase, however, is potentially offset by the elimination of personal exemptions. Therefore, as with the reduction in tax rates and lowering of tax brackets, the increased standard deduction amounts may not lead to a reduction in the total tax paid by a particular taxpayer.
State and Local Taxes (“SALT”) Capped
The itemized deduction for SALT and property taxes have been combined into a single deduction with a cap of $10,000 for both individuals and married couples. This change will certainly have a negative impact on high-income earners and home owners in high-income-tax states (e.g. New York and California).
Estate Tax Exposure Minimized
The exemption for estate and gift taxes has been increased to $11.2 million for an individual and $22.4 million for a married couple. This change sunsets meaning that the exemption amount would return to the $5 million base in 2026 without further congressional action.
Potential Savings for Eligible Pass-Through Entities
Pass-through business income for sole proprietorships, LLCs, partnerships and S-corporations will continue to pay taxes at ordinary income rates. However, eligible pass-through entities will be eligible for a deduction of 20% of the tax payers allocable share-of-business income, subject to certain limitations. The deduction is available if the owner’s income falls under $157,500 for an individual and $315,000 for a married couple. These deductions are phased out over these amounts with a cap of $207,500 for an individual and $415,000 for a married couple.
The above changes are just a few of the many changes to the tax code. If you wish to discuss any of the above changes, or have other questions or concerns, please do not hesitate to contact your Cabana advisor.
-Louis Shaff, CFO