The Tax Cuts and Jobs Act (aka Trump Tax Plan) will be a game changer for corporations; the elimination of the Alternative Minimum Tax (AMT) and consolidation of tax rates down to 21 percent – are all permanent.
But, what does it mean for individual taxpayers? Instead of sweeping reform, the new tax laws are a hodge-podge of adjustments and minor changes that could make tax planning significantly more complicated for some. Critically, these changes are also subject to a sunset provision after 2025.
Because the new tax bill has been both a subject of speculation and undergone several substantial changes throughout the legislative process, many people are confused about how it affects them. Here are eight things you need to know about how the Tax Cuts and Jobs Act could affect business, yourself, and your family.
1) Most Changes are set to Expire
So that the majority of these changes can comply with the Byrd Rule requirement, much of the GOP tax bill changes include sunset provisions that expire by December 31, 2025. What this means is that come 2026, the changes will revert to the rules previously in place, barring any future actions taken by Congress.
All exceptions to the sunset provisions will impact businesses. For example, the GOP bill permanently increases the pass-through business deduction to 20 percent from 17.4 percent.
The sunset provisions can make estate planning more difficult. It may also require legal documents, like wills and trusts, to have much more flexibility worked into them.
2) End of the Obamacare Individual Mandate
Starting in 2019, Americans will no longer face a penalty if they do not purchase health insurance. The individual mandate was an essential part of the Affordable Care Act. Therefore, removing it may effectively gut Obamacare. It was one reason why it was a top priority for Trump.
Although the final bill won’t start the repeal until 2019, the Congressional Budget Office predicts that the change will cause insurance premiums to skyrocket. Ultimately, it will lead to millions more uninsured Americans over the next decade while also cutting government spending by over $300 billion over the same period. It’s unknown whether future changes to health care may prevent insurance costs from becoming unaffordable for most of us by the time the individual mandate repeal takes effect.
3) SALT Cut
The SALT limitation is the most contentious part of the new tax plan. The Tax Cuts and Jobs Act reduced the amount of state and local taxes (SALT) that Americans filing single or joint can deduct from their Federal income to just $10,000. Although the House initially wanted to restrict this deduction to property taxes – the final bill will allow any state and local taxes to be deducted, like:
The most affected taxpayers are high-earners residing in heavily taxed states like California, Connecticut, and New York. There are also worries that this change could cause property values to fall in high-tax localities. As a result, this would leave less money for infrastructure, mass transit, and public schools.
4) The Alternative Minimum Tax (AMT)
The corporate AMT made it hard for businesses to bring their tax bill much lower than 21 percent; CEOs justifiably argued that the AMT prevented investment in staff, equipment, and new plants. The Trump tax plan permanently eliminates the corporate AMT.
The individual AMT was instituted in 1969 to prevent wealthy families from using loopholes and credits to avoid paying their fair share. But, wage inflation over the decades meant that it hit many more taxpayers over time. The AMT kicked in fully for individuals earning more than $120,700 and couples making over $160,900. Under the new tax plan, the threshold rises to $500,000 for individuals and $1 million for joint filers.
5) What’s still Allowed?
The GOP tax bill will keep; the medical expense deduction, the student loan deduction, and graduate student tuition waivers. The final bill also increases the medical deduction temporarily by reducing the threshold from over 10 percent of income to over 7.5 percent of income for 2017 and 2018. Unfortunately, the medical deduction threshold will revert to 10 percent afterward.
6) 529 Savings Accounts for K-12 Private Schools
Formerly, 529 education savings accounts have been restricted to only college tuition and expenses. The new provisions will allow parents to use the money previously saved for their children’s college expenses to pay for private K-12 education, even including home-schooling costs. Senator Ted Cruz (R-Texas), says that the structure of the 529 accounts won’t change and he anticipates that each state will have discretion over what qualifies under the K-12 expansion.
The expanded 529 rules would cover expenses like tuition, school materials (online and print), tutoring and also therapy for disabled students, from private, public, and home schools. The amount of money that can be contributed will vary by state. Some states have limits as high as $500,000 for each account according to the College Savings Plans Network.
7) Tax Credits
The Trump tax plan doubles the per-child tax credit to $2,000 until 2026 for families earning up to $400,000 per year. A maximum of $1,400 of the credit will be available as a tax refund for both lower and middle-income families with relatively low tax liabilities.
The new tax bill will also provide a tax credit for the dependent care of children and older dependents. Furthermore, the current adoption tax credit stays in place.
8) Changes that Affect Homeowners
New homebuyers will now be able to deduct interest only on the first $750,000 of mortgage debt. It is a steep reduction from the previous $1 million cap. Fortunately, the lower limit will not affect current homeowners. The GOP tax bill also ends the deduction for interest paid on home equity loans. Previously, a taxpayer could deduct up to $100,000 in home equity loan interest.
While the mortgage interest deduction had helped make buying a home more affordable for many – the new limits may adversely affect people living in high priced housing markets where homes are more expensive than the $254,000 median price nationwide. By making higher-priced homes less attractive the lower limit could place significant downward pressure on home prices in these areas.
Additionally, under the new plan – as long as they’ve lived there for at least two of the past five years; homeowners will still be able to exclude up to $250,000 for single filers and $500,000 for joint filers from capital gains when selling their primary home.
You can read the details of the bill here: https://www.congress.gov/bill/115th-congress/house-bill/1