As in all things in our complex system of income taxes, the answer is “It depends…”
With the new tax law being so new, hard facts are difficult to come by. The final version of the law signed by the President bears little resemblance to the early draft begun in the House in October 2017. And, there’s been a lot of political hyperbole from both sides of our divided Congress.
The Tax Foundation published an article detailing how six different households would be affected before the ink on the bill was dry. They gave an overview that doesn’t factor in many complexities experienced by many taxpayers. It does give some idea of the major changes coming across a broad income spectrum.
Here are a few ‘facts’ from the early reporting on the new law:
- Most people will have their federal income taxes cut–some reporting says 80% or more of taxpayers.
- The increase in the standard deduction is about the only simplification in the new law. Itemizers are expected to reduce from about 33% of all tax filers down to about 10%. With the standard deduction increase, fewer people with modest income will be required to file.
- Personal exemptions will be eliminated. This will be offset for most taxpayers with dependent children under the age of 17 with the doubling of the Child Tax Credit (CTC). The phaseout for taking this credit is vastly expanded. An additional credit is provided for dependents not qualifying for the CTC.
- SALT taxes (state and local income taxes, including property taxes) will be limited to $10,000 as an itemized deduction. Business deductions for property taxes are not affected. This will largely increase taxes on upper-middle class taxpayers and those in very high property and income tax states. Many of the taxpayers affected are already paying Alternative Minimum Tax (AMT), so the increase in the exemption thresholds there may offset some the regular tax increase.
- The AMT exemption is increased approximately 30%, and the exemption phase-out is vastly expanded. It is expected the number of taxpayers subjected to the AMT flat tax will fall from over 5 million returns to less than 250,000.
- The itemized deduction for acquisition interest on first and second homes acquired on or after 12/15/17 is limited to an aggregate of $750,000 debt. Prior acquisitions retain the former $1 million limitation.
- Deduction of home equity loan interest is repealed ($100,000 debt limitation under prior law.)
- All “2% miscellaneous itemized deductions” such as employee business expenses and investment fees and expenses are eliminated.
- The phase-out of the remaining itemized deductions for high income taxpayers is eliminated, and the allowable deduction for contributions to most charities is increased from 50% to 60% of income.
- The Individual Mandate penalty under the Affordable Care Act is repealed for months after 12/31/18. It remains in effect for 2017 and 2018 calendar year filers.
- Most farmers, sole-proprietors, S-Corporation owners and partners will see a 20% reduction in business income subject to income tax (not self employment tax). This new deduction begins to phase out at taxable income greater than $315,000 (MFJ) or $157,500 for singles. The rules are complex.
- Taxable corporations will be taxed at a flat 21%. That would increase taxes for Iowa corporations with less than $85,000 of taxable income. There has been precious little information released on this, so there may be other factors not widely announced.
- There are many changes coming in deducting property used in business, mostly to the benefit of taxpayers. An excellent review of these changes is found here, thanks to software vendor Pro-Ware.
- Deferral of recognition of gain on like-kind exchanges, other than real estate, is repealed. Click here for more information about this major change.
- The estate and gift tax exemptions are doubled.
Who are the 20% whose taxes go up in this law? High income taxpayers without dependents, particularly those in states with high state income and property taxes. Those of more moderate income with high itemized deductions other than medical expenses or charitable contributions.
Last updated 1/8/18