With the Tax Cuts and Jobs Act (TCJA) expected to save taxpayers over $1.5 trillion in the next decade, the massive overhaul will likely reduce the tax burden for most American and businesses. However, in any sweeping overhaul, there are certain aspects of the tax code that will be changed to either reduce a tax burden or increase tax revenue. Maryland taxation attorney, Steve Thienel talks about the pros and cons of the new tax bill and how it may affect you and your family.
Provisions of the Tax Cuts and Jobs Act That Will Lower Taxes
1. Lower tax rates for individuals
For many Americans, the lowered tax rates will be the most consequential effect of the new tax bill. While the new bill preserves the current seven tax brackets, it lowers the tax rates for five of those seven tax brackets.
2. The standard deduction will almost double
The current tax code has a parallel system for deductions. A taxpayer can either itemize each deduction allowable under the tax code or the taxpayer can take a “standard deduction.” Tax Cuts and Jobs Act will nearly double the “standard deduction.” For single filers, the standard deduction will increase from $6,350 to $12,000. For married couples filing jointly, the standard deduction will increase from $12,700 to $24,000.
In 2016, almost 70 percent of Americans used the standard deduction on their tax returns. With the large increase under the Tax Cuts and Jobs Act, it's likely even more Americans will choose to take the standard deduction over itemizing their deductions.
3. Expands Child Tax Credit
the Tax Cuts and Jobs Act overhauls the Child Tax Credit. First, the tax credit itself will be doubled to $2,000 per child. Second, the tax credit will now be available to more families, specifically high-earning families. Single filers earning up to $200,000 will be able to claim the full child tax credit under the new bill, the current law sets the threshold at $75,000. Married couples filing jointly will be able to claim the full child tax credit with an income of up to $400,000, an increase from the current cut-off at $110,000.
4. Raises Threshold for Alternative Minimum Tax
The Alternative Minimum Tax operates as a parallel tax system. The AMT was originally meant to prevent wealthy taxpayers from using “tax loopholes” to avoid paying taxes. Because the AMT was not automatically adjusted for inflation, the current tax code increasingly applies the AMT to middle-class families. The Tax Cuts and Jobs Act will fix this problem by increasing the income threshold where the AMT will apply – for single filers, the AMT would apply to income over $70,300 (currently, $54,300); for married couples, the AMT would apply to income over $109,400 (currently, $84,500).
5. Raises Threshold for Estate Tax
The estate tax has been dying a slow death across the world, and America is no exception. Currently, estate taxes will only apply if an estate is larger than $5.5 million, for individuals, and $11 million for married couples. At this rate, less than 0.2 percent of all estates are subject to an estate tax. The Tax Cuts and Jobs Act will double that threshold to $11 million for individuals and $22 million for married couples.
Provisions of the Tax Cuts and Jobs Act That Will Raise Taxes
1. Caps State and Local Tax Deductions
In one of the more controversial parts of the Tax Cuts and Jobs Act, the deductions allowed for taxes paid to local and state governments will be limited. Currently, there is no limit to the so-called “SALT” deduction. TCJA limits the amount taxpayers can deduct to $10,000 per year. Limiting this tax deduction will be especially detrimental to taxpayers living in high-tax states, such as the Northeast and West Coast.
2. Lowers Cap on Mortgage Interest Deduction
In a minor blow to homeowners, the mortgage interest deduction for wealthier Americans is slightly lowered. Under the current tax code, taxpayers can deduct interest on up to $1 million in mortgage loans. The Tax Cuts and Jobs Act allows taxpayers to deduct interest on up to $750,000 in mortgage loans.
3. Eliminates Personal Exemptions
Currently, taxpayers are allowed to claim a $4,050 personal exemption for themselves and any spouse or dependents. Most popular with families, the personal exemption reduces a taxpayer’s gross income and thus lowers his or her tax burden. While the increase in the standard deduction will offset this loss for most families, larger families may see their tax burden increase.
4. Repatriation Tax for Multinational Companies
As part of a larger effort to overhaul the tax treatment of multinational companies, the Tax Cuts and Jobs Act will tax the repatriation of corporate assets. For multinational companies that have cash and other assets stashed in other countries, TCJA will now tax the return of those assets. For non-cash assets, corporations will be required to pay a tax rate of 7.5 percent. If a company is seeking to bring cash back to America, the tax rate will be higher at 14.5 percent.
For most Americans and American businesses, the tax bill is about to go down. There are some notable “losers” in the overhaul, though. Taxpayers living in high-tax states and homeowners with high mortgages could see their tax bill increase. Doubling the standard deduction, though, could go a long way in mitigating the harm to these groups.
If you have questions about how the Tax Cuts and Jobs Act may affect your business, schedule a consult with taxation attorney Stephen Thienel today. Mr. Thienel has decades of experience assisting clients in business taxation and tax preparation, IRS litigation, tax compliance, and tax planning for individuals and businesses. Thienel Law, LLC serves clients in Maryland, Virginia, and the District of Columbia.
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