While most of the new tax law – the Tax Cuts and Jobs Act – has to do with reducing the corporate tax rate from 35 percent to 21 percent- some provisions relate to individual taxpayers. Before we get into the details- be aware that almost everything listed below sunsets after 2025- with the tax structure reverting to its current form in 2026 unless Congress acts between now and then. The corporate tax rate cut- however- does not sunset. Here are the highlights for our readership:
- Estate Taxes.If you weren’t worried about federal estate taxes before- you really don’t need to worry now. With the federal exemption already scheduled to increase in 2018 to $5.6 million for individuals and $11.2 million for couples- the Republicans in Congress and President Trump have now nearly doubled this to $11.18 million (estimate) and $22.36 million (estimate)- respectively- indexed for inflation. The tax rate for those few estates subject to taxation remains at 40 percent.
- Tax Rates.These are slightly reduced and the brackets adjusted- with the top bracket dropping from 39.6 percent to 37 percent.
- Standard Deduction and Personal Exemption.The standard deduction increases to $12-000 for individuals- $18-000 for heads of household and $24-000 for joint filers- all adjusted for inflation. Personal exemptions largely disappear.
- State and Local Tax Deduction.Now referred to as “SALT-” this is now subject to a cap of $10-000-
- Home Mortgage Interest Deduction.The limit on deducting interest on up to $1 million of mortgage interest stays in effect for existing mortgages. New mortgages taken on after December 15- 2017- are subject to a $750-000 limit. The deduction for interest on home equity loans disappears.
- Medical Expense Deduction.After much outcry in response to the House version of the tax bill- which would have eliminated the medical expense deduction– it survived. And- in fact- it was enhanced by permitting medical expenses in excess of 7.5 percent of adjusted gross income to be deducted in 2017 and 2018- after which it reverts to the 10 percent under existing law.
- 529 Plans.These accounts permitting tax-free accumulation of capital gains and dividends to pay college expenses can now be used for private school tuition of up to $10-000 a year.
Depending on your income and the amount of state and local taxes you have been paying- you may get a small tax cut. The bigger question is how the projected reduction in tax revenues of $1.5 trillion over the next 10 years will be paid for. This amount may simply be added to the deficit- or it may be used as a justification for “entitlement reform-” i.e.- cutting Medicare- Medicaid or Social Security. It may also squeeze out other spending- such as investment in infrastructure.