On December 20, 2017, the House approved the Tax Cuts and Jobs Act (TCJA) bill, and President Trump signed it on December 22, 2017. It retained the seven tax brackets and modified the tax rates and thresholds. Further adjustments were made to individual deductions and corporate (business) taxes.
Taxpayers need to understand that this new structure is technically temporary. Congress has the option to take further action in 2025. Until that time, taxpayers are subjected to the new tax rules. What hasn’t changed is that every taxpayer will still try to find a bottom-line tax strategy to keep more earnings by taking advantage of these new tax codes. This new tax code is intended to simplify the filing process and generate more disposable income for taxpayers.
Higher Tax Withholdings and Lower Year-End Tax Liability
In January 2018, the new tax codes changed the country's payroll withholding deductions. Employers were allowed time to implement the new change, so individual taxpayers may not have seen the adjustment in their paychecks until February 2018.
- Reflected in the new withholding tables is the increase in the standard deduction of $24,000 for joint filers; $12,000 for single taxpayers (or those married and filing separately); and $18,000 for heads of households.
- Some taxpayers may be required to pay an additional Medicare Tax if their income exceeds certain limits. The Additional Medicare Tax rate is 0.9 percent, and applies to income that is more than a threshold amount. Those thresholds are $200,000 for those who are single and $250,000 for married taxpayers.
New Standard Deduction Formula:
In previous years the standard deduction ($6,500) and the personal exemption ($4,050) totaled $10,650 helping to reduce the adjusted gross income. The new tax code now combines the two deductions (eliminating the personal exemption) with an increased total of $12,000 for single filers and $24,000 for married filers. That is close to double the levels for 2017.
New Tax Brackets and Thresholds
The approved tax brackets reduced five of the proposed seven tax rates by as much as four percent. The majority of taxpayers will benefit from the new tax codes. There's a second notifiable change. The bill eliminated the marriage tax penalty. Previous tax codes taxed dual-income households at higher marginal tax rates compared to a single taxpayer earning the same amount of income.
- Taxpayers earning $82,700 to $157,500 under the past tax rate paid 28 percent. Under the new and improved tax rate, these same taxpayers are taxed at 24 percent.
Singles and heads of household now share the same marginal tax bracket calculations of 37 percent when earning up to $500,00 as married couples earning up to $600,000. The change allows married couples to earn $100,000 more without a tax hike.
Corporations, Enterprises, and Businesses
The Tax Cuts and Jobs Act (TCJA) lowered the tax burden for pass-through businesses. New laws now provide a 20 percent deduction for qualified business income earned by S corporations and limited liability companies.
Under the previous tax code, the revenue would pass-through to the owner’s personalized taxes, subject to a higher individual income tax rate. In some cases, the individual income tax rates were higher than the established C corporation rate.
- Qualifying for the full deduction requires your taxable income to be below $157,500 as a single tax filer and $315,000 for married and filing jointly.
There are precautions with this new deduction. Enterprises with two partners may find only one partner qualifies. Why? The reason is due to either higher earnings for one partner or a high-income earning spouse (jointly filing), surpassing the legal thresholds for this deduction.
Most of the tax changes impact personal taxation. It's essential to talk with a professional to be sure you’re prepared to take full advantage of the new tax codes. The key to tax prosperity is proper planning.
Don't worry about being confused. You're not alone. It takes knowledge and skill to manage your tax liability. By working with an experienced tax professional, you won’t end up paying more than the law requires.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.