In late 2017, the U.S. Senate and the House of Representatives passed on legislation that will bring the most sweeping reform to the nation’s tax code in decades. A compromise between two separate bills created by each chamber of Congress, it’s known as the Conference bill and follows the Senate’s version more than the bill that the House initially drafted. It will now head to President Donald Trump for his signature, which is expected in the coming days.
With the wide range of changes affecting both individual and business returns, most Americans are bound to be impacted by the new law. But what does it mean for you personally? While each individual’s tax picture is unique, we’ve highlighted six areas that are most likely to affect much of the U.S. population.
New Income Tax Brackets/Rates
There will now be seven tax brackets (as opposed to six) for individuals: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most of these percentages are either the same or slightly lower as those in the existing tax code. Assignment to a tax bracket still depends on your income level as well as whether you’ve filed as single, married filing jointly, married filing separately, or head of household. A breakdown of the income levels for filing joint or individual returns:
You can also refer to a preliminary chart created by National Public Radio for a graphical representation (please note that this chart has not yet been vetted by James Moore & Co.).
The new law also includes four income brackets for estates and trusts: 10%, 24%, 35% and 37%. This is down from five brackets in the existing law that ranged from 15% to 39.6%. Additionally, the exemption from Estate transfer tax increases from the current $5,490,000 level to roughly $11,200,000 for 2018.
It’s important to note that these new brackets are not permanent. They expire after 2025, at which time they would return to their existing levels.
Increased Standard Deduction
The standard deductions have nearly doubled for all filers, rising to $24, 000 for married people filing jointly, $18,000 for heads of household, and $12,000 for single filers and married people filing separately. This is especially notable as personal exemptions have been temporarily suspended until Jan. 1 2026 in the new legislation. Also for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, (from $1,000 currently) and other changes are made to phase-outs and refundability during this same period.
New Pass-Through Income Deduction
Owners of S corporations, partnerships and sole proprietorships will be allowed a temporary deduction in an amount equal to 20% of qualified income of pass-through entities. The deduction is subject to a number of limitations and qualifications.
Reduced Corporate Tax Rate
Corporations now have a flat tax rate of 21% instead of graduated rates ranging from 15% to 35%. Unlike the individual tax brackets, the flat corporate tax rate is a permanent change to the tax code.
Increased Code 179 Expensing
In some cases, a taxpayer may be able to deduct the cost of property or assets purchased for use in the activity involved with running a trade or business. Expensing allows you to recover the costs immediately instead of over a period of time via depreciation deductions.
The new legislation doubles the maximum amount you can expense under Code Sec. 179 from $500,000 to $1 million. The investment limitation has also been increased from $2 million to $2.5 million.
100% Cost Recovery of Qualifying Business Assets
With the new law, a business can take a 100% first-year deduction for depreciation for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023 (or Jan. 1, 2024, for certain property with longer production periods).
Under existing law, this deduction was only at 50% of the cost of new property. There are also different stipulations for specific types of assets and productions.
The allowable bonus depreciation percentage goes down in future years as follows (and sunsets entirely after 2026):
- 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
- 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
- 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
- 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.
While this guide serves as a good start to understanding some of the new tax legislation, there are many additional provisions, qualifications, limitations and other details. Contact your CPA for more thorough and definitive information about how the new laws affect you and/or your business.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.