As many of you know, today House announced the Tax bill has been passed. I wanted to take the opportunity to highlight some of forthcoming changes with the approved bill. Big Picture items: I believe the GDP of our country will grow somewhat (not by a lot) in coming few years. This may also increase wages at bit steeper rate than recent past, however, increased wages may not buy us more goods or services in return regardless, mainly due to the higher inflation expected out of this bill. While corporate rates are being cut significantly helping big companies the most, the individual taxes are cut only by very little amount (and that too temporarily only).
This bill will be in effect beginning of next year, 2018. In other words, TAX forms won’t see the change due to this bill until in early 2019, when filing taxes for the year of 2018.
By no means, I am trying to make this blog into news channel but the reason of this post is mainly to identify how this bill will affect most of us and to better plan for taxes in future, so without further ado, let’s dive right into it:
Highlights from the Approved TAX Bill:
The tax filing will be much simpler now.
This can negatively affect tax lawyers for who rely on individuals tax files and can also impact negatively to companies such as HR Block, Tax Act, Tubro Tax etc. I paper file my own taxes for many years and this TAX Bill will make my life much simpler going forward.
Corporate Taxes Reduced Permanently from 35% down to 20%.
Big businesses will benefit the most from this since this accounts for the biggest ever one-time drop in corporate tax rates. This reduction in tax rate is permanent. This will encourage big companies such as Microsoft, Apple, Pfizer, Cisco etc to bring their overseas cash back in USA. The tax rate to bring back money to US will be about 12 % as oppose to previous rate of 35 % specially when money is brought back from the low tax countries outside US. This can also cause higher inflation going forward.
Estate Tax minimums raised and Estate Tax will be eliminated altogether in 2024.
Estate tax was required to pay when any plants, properties or any other assets worth more than 5.5 millions was passed on to heirs. With the new TAX Bill, this minimum is now raised double to 11 millions (22 millions for couples) before one has to pay estate tax starting 2018. Moreover, this estate tax is planned to be eliminated altogether in 2024.
Overall TAX Rate will reduce for most Americans for Next 5 Years ONLY.
Overall tax liabilities will reduce for about 92% of the Americans for upto next 5 years, accordingly to official estimates from Joint Committee on Taxation. However, after 5 years in 2023, only 40% of Americans will see reduced taxes while 22% of American will pay more taxes compared to what they are paying currently.
Tax Brackets are Reduced.
Tax brackets are reduced from seven down to only four brackets. The new four brackets will be 12%, 25%, 35% and 39.6%.
Standard deduction will be doubled.
From Year 2018, standard deduction will be about doubled. Standard deduction for married filing jointly will now be $24,000 and $12,000 for singles. That means more people will be filing standard deduction going forward making tax filing much simpler. Per one of the survey, currently 70% Americans file their tax return using standard deduction. That number is expected to grow to 90% with this change.
Child TAX Credit Increased.
From Year 2018, Child Tax Credit will be increased to $1,600 per kid compared to $1,000 per kid as currently allowed.
Itemized deduction is Reduced.
All itemized deductions are essentially eliminated except the three that are going to stay, charitable donations, property tax upto $10,000 a year and mortgage interest deduction. However, mortgage interest deduction will be capped to maximum of 500,000 mortgages, halving from what is currently allowed. This will significantly affect the states or cities with very expensive houses such as California, Boston, New York City etc. where people won’t be able to take full deduction of paid interest over capped amount of mortgage.
401k Exemption remains.
Now upto $18,500 can be contributed for year 2018 per person towards 401k contribution. For 50 and older, previously the additional catch up contribution was limited to after-tax Roth only, now with new bill, pre-tax (traditional) 401k catch up contributions will also be allowed.
Moving Expense deduction is eliminated. (EXCEPT for the members of military)
Medical Expense Deduction is eliminated…
Deduction for theft or loss of valuables is eliminated…
Student loan Interest deduction is eliminated.
The BIG change for the scholar Grad students who get tuition waiver either due to teaching assistant-ship or research assistant-ship (I was getting one when I was a grad student myself) will now have to pay INCOME TAXES on WAIVER AMOUNT OF TUITION.
Writing off cost of paperwork for filing taxes goes away…
Hope this was somewhat helpful or insightful to you.
What are your thoughts on new TAX bill ? Will this be Good change for our economy ?