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As soon as the Tax Cuts and Job Act (TCJA) was signed into law, just about everyone asked, “How does this affect my taxes?” Now that the ink has dried, we can start to answer that question more clearly and specifically. The bottom line, at least according to the Tax Policy Center, is that 95% of U.S. taxpayers, regardless of income level and tax bracket, will see a reduction in their tax liabilities starting in 2018. Here’s how it breaks down.
1) High-income taxpayers will have a larger benefit, temporarily.
- The individual with taxable income over $500,000 and the married joint filers with over $600,000 in taxable income will now benefit from a lower overall tax rate which was reduced to 37% from 39.6%.
- Individuals with income of $500,000 or less and married joint filers with income of $600,000 or less will also benefit as the threshold of income to trigger the highest 37% tax rate was increased.
- Previously, individuals with taxable income over $418,400 and married joint filers with taxable income over $470,700 were taxed at the highest rate of 39.6%.
- Now, the threshold of income to hit the highest tax rate has not only been increased, but the overall tax rate itself has been decreased.
- Note that this is not currently intended to be a permanent state of affairs, however, as the provision is set to expire at the end of 2025.
2) Fewer specific deductions, more standard deduction total. Yes, it is true that certain deductions will no longer be allowed—like interest paid on home equity loans (through 2025), and alimony to an ex-spouse if the divorce decree or separation agreement is finalized after December 31, 2018. Even the cap of $10,000 on paid state taxes or the limit on deductions of interests on new mortgages are not a reason to panic. This is because the standard deduction has been doubled to $12,000 for individuals and $24,000 for married joint filers. This will usually make up for the loss of these other deductions.
3) The estate and gift taxes live the high life. While there was an effort to ditch the estate tax entirely, it was unsuccessful. The compromise, however, was to raise the limit at which estate and gift taxes kick in to even higher levels than ever before. For the next eight years, no estate or gift tax will be owed on individual estates of $11.2 million or less and on married joint filers’ estates of $22.4 million or less. Remember also, that only the amount of the estate over these thresholds is taxed at the 40% rate. Like other provisions in the TCJA for the wealthy, this provision is set to expire at the end of 2025.
4) There’s a new option for education expenses. Many families have already set up 529 college savings plans. The TCJA now allows parents to take up to $10,000 tax-free annually through 2025 to pay for private or religious school education for grades K through 12. If an individual donates $15,000 or less to the 529 in a given year, they can take this $10,000 amount and avoid gift taxes. A married joint filing couple can donate up to $30,000 and still have this option.
Contact Us
You still probably have a lot of questions about the TCJA and its impact on your particular tax liabilities, and that’s what we are here for. The good news is that the attorneys at Weisberg Kainen Mark can answer all of your questions and assist you in estate planning to maximize the benefits of the TCJA while avoiding the pitfalls. Contact us today to get started.
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