Tax and Financial News for December 2017
The Final Tax Bill
The much anticipated Republican tax bill is finalized, with President Trump expected to sign the legislation into law before Christmas. The final bill codifies significant changes to personal business tax laws, both in terms of tax structure and rules. Below is a summary of the key provisions in their final form compared to current tax law.
Income Tax Rates
Overall, the bill reduces individual income tax rates; however, these cuts expire after 2025. The alternative minimum tax is retained, but the exemptions are increased so fewer taxpayers will be subject to it.
Standard Deduction and Exemptions
The Republican bill provides for nearly doubling the standard deduction, but also eliminates personal exemptions. Overall, the result will be significantly fewer taxpayers itemizing deductions as they will no longer exceed the new, higher standard deduction.
Strongly tied to the change increase in the standard deduction are alterations to itemized deductions. The limits on state and local tax deductibility will impact those in high state income and real estate tax states, as well as those where property values and thus mortgages are high.
Many provisions in the tax code, including most of the above, are tied to inflation indexes that drive their annual increase. Currently, the Consumer Price Index (CPI) is used; however, the new bill will move this to the Chained CPI (C-CPI). The C-CPI generally results in lower inflation increases and will thus be less generous to taxpayers’ overtime.
Child Tax Credits
While the removal of personal exemptions appears to impact larger families, this is somewhat overridden by changes to the child tax credits.
Despite earlier versions of the bills, there are little to no changes in education deductions and credits. The following provisions remain unchanged versus current law: education credits (American Opportunity Tax Credit, Lifetime Learning Credit and Hope Scholarship Credit), student loan interest deduction, graduate tuition wavier and classroom expense deduction.
The one thing that did change is the education savings plans rules, which now expand to allow the use of 529 college savings accounts for K-12 private school tuition.
Other Individual and Pass-Through Tax Changes
The new tax bill changes a number of other tax laws impacting individuals, including those related to the ACA, the estate tax and pass-through businesses where taxes are paid at the individual level.
Business Taxes and Credits
The new law creates a number of changes to business taxation as well. The changes will impact all aspects, including tax rates, deductions and credits. The main drivers are a lower over corporate tax rate, offset by more restrictive or eliminated deductions.
The new law alters the landscape for multi-national corporations from a worldwide tax system to a territorial system that only taxes domestic profits.