There are 11 general categories of changes for individuals in the House version of the bill. As of November 17, the House has passed the bill, but the Senate has not yet voted on it. The Senate has their own version, but they have not passed that bill as of today. Please note that these are NOT the business tax changes. That’s where the gold is
Want to pay less tax in 2018? Start a business. It’s never been more true.
These 11 changes are:
#1: Replaces the 7 existing tax brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) with 4 (12%, 25%, 35% and 39.6%)
Strictly based on the tax brackets, if your income is lower than $9,325, your taxes will go up. If you make $45,000 (the top amount of the new 12% bracket), your taxes will go down.
If you make $45,000 – $200,000, your taxes will go down.
If you make $200,000 – $500,000, your taxes will go down.
Over $500,000 in income and just based on tax brackets, you won’t see a lot of change.
#2: Increases the standard deductions
For higher income taxpayers without businesses, their itemized deductions are often the only tax break still around. With a higher standard deduction and less itemized deductions allowed, there will be less write-offs outside of a flat rate amount. It will make tax prep a lot easier for W-2 employees, but it likely comes at a price, especially for people in in high state income tax states, people with unreimbursed expenses, casualty losses or a lot of medical expenses.
The only way to pick up most of these expenses is with a business set up the right way.
#3: Repeals the deduction for personal exemptions
The losers here will be people with large families. Regardless of whether you have no children or 20, your deduction is the same. Zero.
#4: Increases the child tax credit and establishes a new family tax credit
This seems, at first glance, to be contrary to the last change, but it’s not. The child tax credit is ONLY for dependent children under the age of 17. There is a temporary, much smaller, credit available for adult children with disability and elderly parents you may support. The overall effect, though, is that there is a whole lot less deduction/credit available.
#5: Repeals certain itemized deductions.
Itemized deductions will change greatly. Your mortgage interest deduction is limited to just the interest on $500,000 of acquisition debt. HELOC interest will not be deductible.
State income taxes paid will not be deductible. Neither will medical expenses, moving expenses, alimony payments, medical savings accounts and unreimbursed employee deductions.
#6: Changes primary residence capital gain exclusion.
Current law says if you live in your house for 2 of the previous 5 years, you have a capital gain exclusion. This has been changed to a requirement to live in the house for 5 of the previous 8 years.
#7: Repeals the deduction for state and local taxes
This has been hotly debated and seems to be unfairly targeting high tax states like California and New York, among others,
#8: Repeals the deduction for medical expenses
Not only is the deduction for medical expenses gone, you can no longer use the popular medical savings accounts.
#9: Consolidates and repeals several education-related deductions and credits.
Probably the best way to sum this up is don’t assume anything about the various education credits. A lot has changed.
#10: Repeals AMT.
The Bill repeals AMT. If your income is above $50,000, you have real estate, you have capital gains or any of another dozen triggering events, this is good news. It will definitely make tax calculations simpler.
#11: Repeals the estate and generation-skipping transfer taxes in 6 years.
This is clearly a tax change targeting the wealthy. Most of us won’t see a change
There are a lot of other repeals such as the adoption assistance program, employment achievement award, dependent care assistance and more.
This is meant just as a brief overview of changes for individuals. Most all of these deductions still exist for business owners. Keep watch here for blogs with strategies for surveying the sweeping tax changes.