As a tax attorney who has been witnessing the sweeping changes to our country’s tax laws during the last six months, I wake up every day researching and combing through resources in a fervent attempt to gain new nuggets of information and grasp the complexities shrouded in the 2017 Tax Cuts and Jobs Act.
Although the magnitude of this seismic shakeup cannot fully be felt for years to come, what we can do is become engaged in these changes by educating ourselves and identifying parts of this tax bill that affect us or affect the people close to us. Over the next four posts, I will highlight four key areas that have been fundamentally altered by the new law: individuals, business entities, trusts, and international tax.
Part One: Individuals
By now you have probably already heard that the individual maximum federal income tax rate has been reduced from 39.6% to 37%. Both the maximum long-term federal capital gains tax rate and dividends tax rate remain the same at 20%.
The Act seeks to curtail the amount of deductions that may be taken for state and local taxes and personal property taxes by capping the total combined amount to $10,000, where there was no cap prior to the Act. In addition, individual tax filers can borrow up to $375,000 and taxpayers married filing jointly can borrow up to $750,000 to acquire, construct or improve a principal residence (or second home) and still qualify for the itemized deduction. This is another move to limit the total amount of deductions that individuals can take where the prior maximum allowable acquisition indebtedness was $500,000 for individuals and $1 million for married taxpayers. The deduction for interest on home-equity indebtedness is suspended. The Act further eliminated a deduction for interest paid or incurred on home-equity indebtedness up to $100,000 for married filing jointly taxpayers, or $50,000 for single-filers.
But where Congress taketh, Congress also giveth (sort of). The Act increased the standard deduction from $12,700 to $24,000 for those married filing jointly and from $6,350 to $12,000 for single filers.
So, what do all of these changes ultimately translate to? Some taxpayers may end up shifting from electing the itemized deduction to the standard deduction. Other taxpayers may continue to elect the itemized deduction, albeit under the new limitations.
Take note that all of these changes are effective from 2018 through 2025 and scheduled to sunset (or otherwise be modified or phased out) beginning 2026.