On December 27, President Trump officially signed the Tax Cuts and Jobs Act into law. The bill slices the corporate tax rate from 35 percent down to 21 percent in 2018, with the top individual rate falling to 37 percent. The bill is also notable for cutting income tax rates, doubling the standard deduction and completely eliminating personal exemptions. The corporate tax cuts are permanent, but the changes to individual tax laws expire after 2025.
Here are a few examples of how the act will affect income taxes, child and elder care deductions and business taxes. Discuss these with your tax service in Des Moines, IA if you have any questions.
Income taxes
The new law keeps seven income tax brackets, but lowers tax rates. These changes will start being reflected in withholdings in February 2018. Some examples of additional income tax changes include:
- Doubling the standard deduction from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married and joint filers. The deduction will revert back to current levels in 2026. Currently 94 percent of taxpayers take the standard deduction.
- Eliminating personal exemptions. Before the Act, taxpayers would subtract $4,150 from income for every person claimed. This mean some families with many children could pay more in taxes, despite the higher standard deduction. The act also eliminates most itemized deductions, but keeps deductions for charitable contributions, retirement savings and student loan interest.
- Eliminating deductions for mortgage interest on the first $750,000 of a loan. No interest on home equity lines of credit can be deducted.
- Doubling the estate tax exemption to $11.2 million for singles and $22.4 million for couples.
- Repealing the Affordable Care Act tax levied on people without health insurance beginning in 2019.
Child and elder care
Some changes in child and elder care taxation include:
- Increasing the tax credit from $1,000 to $2,000. Parents who do not earn enough to pay taxes can claim a tax credit up to $1,400.
- Enabling parents to use 529 savings plans for tuition at private and religious schools.
- Instituting a $500 credit for all non-child dependents to help care for the elderly.
Business taxes
Some changes in business taxes include:
- Lowering the maximum corporate tax rate to 21 percent from 35 percent, which makes it the lowest rate since 1939.
- Raising the standard deduction for pass-through businesses to 20 percent, a change that ends after 2025.
- Capping interest expense deductions for corporations at 30 percent of income.
- Allowing businesses to deduct the cost of depreciation for certain assets in a single year rather than having to amortize them over the course of several years. This does not apply to buildings/structures.
- Eliminating the corporate AMT, which previously had a 20 percent tax rate that applied if tax credits resulted in the firm’s effective tax rate being below that level.
For more information about how the new tax legislation could affect you this year and beyond, contact our trusted tax service in Des Moines, IA today.