The biggest piece of tax legislation passed in the last 30 years (the Tax Cuts and Jobs Act), signed late last year by President Trump, significantly overhauls individual and corporate income tax rates beginning in 2018. Here are some of the most important highlights of the new law.
Rate changes for individuals. Individuals are subject to income tax on “ordinary income,” such as compensation and most retirement and interest income, at increasing rates that apply to different ranges of income depending on their filing status (single; married filing jointly, including surviving spouse; married filing separately; and head of household). Currently those rates fall into seven tax brackets:10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Beginning with the 2018 tax year and continuing through 2025, there will still be seven tax brackets for individuals, but their percentage rates will change to: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The bottom line is while these changes will lower rates at many income levels, determining the overall impact on any particular individual or family will depend on a variety of other changes made by this new law. These include increases in the standard deduction, loss of personal and dependency exemptions, a dollar limit on itemized deductions for state and local taxes and changes to the child tax credit and the taxation of a child’s unearned income, also known as the “Kiddie Tax.”
Capital gain rates. Three tax brackets currently apply to net capital gains, including certain kinds of dividends, of individuals and other non-corporate taxpayers: 0% for net capital gain that would be taxed at the 10% or 15% rate if it were ordinary income; 15% for gain that would be taxed above 15% and below 39.6% if it were ordinary income, or 20% for gain that would be taxed at the 39.6% ordinary income rate.
The new tax law, generally, keeps the existing rates and breakpoints on net capital gains and qualified dividends. For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, and $425,800 for any other individual (other than an estate or trust).
It is important to note that these new individual income tax rates will not affect the tax on the returns people will soon be filing for 2017. However, they will almost immediately affect the amount of wage withholding and the amount, if any, of estimated tax people may need to pay.
A related change is that the future annual indexing of the rate brackets (and many other tax amounts) for inflation, which helps to prevent “bracket creep” and the erosion of the value of a variety of deductions and credits due solely to inflation, will be done in a way that generally will recognize less inflation than the current method does. While it won’t be very recognizable immediately, over the years this will push some additional income into higher brackets and reduce the value of many tax breaks.
Corporate income tax rate drop. C corporations currently are subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Personal service corporations pay tax on their entire taxable income at the rate of 35%. (The benefit of lower rate brackets was phased out at higher income levels.) Beginning with the 2018 tax year, the new law makes the corporate tax rate a flat 21%, and also eliminates the corporate alternative minimum tax.
Due to the far reaching effects of the Tax Cuts and Jobs Act, determining the overall impact on any particular individual, business or family will depend on a variety of other complex changes made by this new law. While many planning opportunities are now present – there may be just as many pitfalls without the proper guidance and support. To ensure you are accounting for all scenarios and taking advantage of all potential tax planning strategies, we advise that you work closely with your tax advisor to assess your individual situation.
Our team of experts are continually monitoring developments for further guidance from Congress and the IRS on the above tax reform legislation provisions, and will provide updated information and analysis as necessary.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.