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The most significant overhaul of the tax code in decades was recently signed into law, and it’s kind of a big deal.1 Tax reform can make even the most zealous followers of politics a bit sleepy, so here’s a summary of some key aspects of the new law that may apply to you. Will the changes help support your confident financial outlook in 2018 and beyond?
Corporations are arguably most impacted by the Tax Cuts and Jobs Act (TCJA), which the President signed into law on December 22, 2017. The law lowers the top U.S. corporate tax rate from 35 percent to 21 percent.2 That’s the lowest since 1939.3
As businesses thrive, how about their workers? Supporters of the bill say it makes corporations more competitive globally and improves production (Read: more jobs) in the United States. With less money going to Uncle Sam, companies may share some of the surplus among their employees. While AT&T, JetBlue Airways, Comcast and dozens of other companies have given unscheduled employee bonuses, time will tell if widespread salary hikes are ahead.4 In early January, Walmart said it planned to raise its minimum wage from $9 an hour to $11, citing tax reform as the reason.5 At SunTrust, we’re increasing our minimum hourly payment to $15 and pledging $50 million in additional community grants to help fund financial well-being causes.6
Rate cuts are permanent for businesses, but nearly all tax changes for individuals are only in place until the end of the 2025 tax year.7
For individuals (that’s you!)
Nearly everyone will see a little boost in their paycheck starting in February because companies will start withholding less in taxes, though some will benefit from the tax cuts more than others. Remember—this impacts taxes for 2018—not your 2017 taxes, for which you may have already started preparing to file a return.8
Here’s how the average personal tax rates break down by income level:
Regarding deductions: The standard deduction is a number the government allows you to deduct from your income tax without having to itemize your deductions. Examples of itemized deductions are mortgage interest payments or payments made for state or local taxes. As of tax year 2018, your standard deduction is nearly doubled, from $6,350 to $12,000 for singles and $12,700 to $24,000 for married couples.11, 12 Many items that previously could be itemized have been eliminated and there is now a $10,000 limit on the state, local, and property tax deduction.
This means it’s more likely that you’ll take the standard deduction versus tracking your individual deductions throughout the year, though every situation is different. This could make tax time easier for you.
But there’s a trade-off. You’ll no longer be able to take personal exemptions—an amount you can deduct from your income for every taxpayer (and dependent) under your roof. For tax year 2017, that amount was $4,050 per person.13
The bottom line: Simple scenarios
If you’re single (or married and file taxes jointly)…
If you already do not itemize your deductions, this is fairly easy math. Single? Your overall tax rate will be adjusted according to your income. Your standard deduction jumps from $6,350 to $12,000, but you lose your personal exemption of $4,050, for a net change (higher standard deduction of $12,000, minus the loss of your $4,050 personal exemption) of $1,600. Married? You lose $8,100 in the personal exemptions ($4,050 for you and your partner) but your standard deduction increases by $11,300. The net difference in your total deductions equals $3,200.
If you have children…
For children under 17, the after-tax child credit has doubled to $2,000 (some income restrictions apply).13 There’s also a new post-tax credit of $500 for other dependents, such as elderly parents or adult children living at home. Every little bit helps, right? Which is why the loss of the $4,050 personal exemption (a pre-tax deduction) could sting a bit, particularly if you have more than one child. A family with children may end up faring better or worse (financially speaking) under the new law, depending largely on their marginal tax rate.
If you’re considering buying a home…
If that dream home is already on your radar, a heads up: New homebuyers will now be able to deduct interest payments on the first $750,000 of mortgage debt; that’s down from $1 million. Existing homeowners with property bought prior to December 15, 2017, are grandfathered in under the old rule.15
If you’re a homeowner…
Are you considering using a home equity line of credit (HELOC) for home improvements or debt consolidation? The new law limits the ability to deduct the interest payments. However, interest-deductible HELOCs and second mortgages should still be available to homeowners if:
- the proceeds of the loan are used to “substantially improve” their home, AND
- the combined total of their first mortgage balance and their HELOC or second mortgage does not exceed the new $750,000 limit on mortgage amounts qualifying for interest deductions.14
If you’re a small business owner…
Millions of small LLCs and independent contractors are allowed to take a 20% deduction on “qualified” business income. But “qualified” is a loaded word, and there are a lot of limitations to consider, so be sure to consider all implications of this deduction.16
If you’re due for a big inheritance…
Under prior law, in 2018, any inheritance north of $5.6 million (for individuals) could have been hit with a 40-percent tax. Under the new law, that threshold has doubled to $11.2 million (subject to annual inflation adjustments) … through the end of 2025.17, 18
Two key non changes
If you’re considering selling your home…
Those who sell their homes for a profit (congrats!) can still exclude up to $500,000 for couples ($250,000 for single filers) from capital gains taxation.19
If you’re a recent grad with student loan debt…
Rest easy. The annual deduction for student loan interest ($2,500) is unchanged.20
So … what am I missing?
Despite the benefits the bill provides, there are reasons why the bill had an approval rating of 33 percent.21 Critics focus on some of the potentially adverse impacts of the bill, such as:
Federal deficit: The Joint Committee on Taxation believes the TCJA will add $1.5 trillion to the federal budget deficit over the next decade.22
Impact to health care: The TCJA repeals the individual mandate portion of the Affordable Care Act. (Translation: you won’t pay a penalty for opting out of health coverage.) While this is expected to save the government more than $300 billion, some worry this will lead younger, healthier people to forgo insurance entirely, raising premiums for those who are in greater immediate need.23
- Take a deep breath. There is a lot to learn and consider, but remember that very little of this will impact the 2017 tax returns you’ll be filing in a month or two. The few provisions that apply to 2017 include changes to deduction amounts for medical expenses and business property.8
- Think strategically about giving back. If you’re used to itemizing those donations to your alma mater or your favorite non-profit, you may wish to consider the fact that you may no longer get a tax deduction in light of the increased standard deduction. You may opt to change your giving strategy, by clustering charitable gifts in years when you choose to itemize for other reasons.
- Grab your calculator. While all of the changes to deductions and exemptions won’t make a tangible difference until next April, your paycheck will look different soon. Figure out how much more you’re taking home and make a plan for the excess, even if it’s just a few bucks a month.
- Ask for help. Reach out to your tax professional and financial advisor for more personalized recommendations that align with your specific income and expense situation.
1 “34 things you need to know about the incoming tax law,” Dec. 26, 2017, CNN Money
2 “The final GOP tax bill is complete. Here’s what is in it.” Dec. 15, 2017, The Washington Post
3 “Corporate Top Tax Rate and Bracket,” Feb. 14, 2017, Tax Policy Center
4 “Less than meets eye: Bonuses, not raises, from U.S. tax cuts,” Jan. 10, 2018, Chicago Tribune
5 “Wal-Mart Hikes Minimum Wage To $11 As Tax Cuts Trickle Down To Workers,” Jan. 11, 2018, Investor’s Business Daily
6 “SunTrust to Increase Minimum Wage, Build Teammate Savings and Create $50 Million Community Fund for Financial Well-Being,” Dec. 28, 2017, SunTrust Banks, Inc.
7 “When Will the New Tax Plan Kick In?” Dec. 21, 2017, The New York Times
8 “Tax Reform Changes That Impact Your 2017 Taxes,” Updated December 2017, TurboTax
9 “Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act,” Dec. 18, 2017, Tax Policy Center
10 “The Final Tax Reform Bill,” Dec. 21, 2017, SunTrust Advisory Services, Inc.
11 “How to Use the Standard Tax Deduction,” Nov. 9, 2017, the balance
12 “What The 2018 Tax Brackets, Standard Deductions And More Look Like Under Tax Reform,” Dec. 17, 2017, Forbes
13 “What's in the GOP's final tax plan,” Dec. 22, 2017, CNN Money
14 “Did the tax code overhaul kill home equity loans?” Jan. 17, 2018, The Washington Post
15 “The Tax Cuts and Jobs Act - What it Means for Homeowners and Real Estate Professionals,” Dec. 20, 2017, National Association of REALTORS
16 “Tax Geek Tuesday: Making Sense Of The New '20% Qualified Business Income Deduction,'” Dec. 26, 2017, Forbes
17 “Ten Facts You Should Know About the Federal Estate Tax,” Oct. 30, 2017, Center on Budget and Policy Priorities
18 “Final Tax Bill Includes Huge Estate Tax Win For The Rich: The $22.4 Million Exemption,” Dec. 21, 2017, Forbes
19 “Homeowners: Here's what's in the tax bill for you,” Dec. 17, 2017, CNN Money
20 “Tax bill and your tuition: Here's what to expect,” Dec. 16, 2017, CNN Money
21 “Americans have already made up their minds about the tax bill — and it looks brutal for the GOP,” Dec. 19, 2017, Business Insider
22 “JCT Estimates: Final GOP Tax Bill Skewed to Top, Hurts Many Low- and Middle-Income Americans,” Dec. 19, 2017, Center on Budget and Policy Priorities
23 “Without the Insurance Mandate, Health Care’s Future May Be in Doubt,” Dec. 18, 2017, The New York Times
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