We hope you have all had a very Merry Christmas and are looking forward to a wonderful new year. As you have probably heard by now, on December 22, 2017 President Trump signed the Tax Cuts and Jobs Act (the "Act”). The Act goes into effect January 1, 2018 so virtually none of these provisions will affect your 2017 tax return, however, it might affect how you plan for your 2017 taxes. We thought it was important to send you our brief summary of this very comprehensive tax reform package. Nothing contained herein should be construed as tax advice and you should certainly consult your tax advisors for specific application to your situation.
Generally, the Act cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual tax rate will drop to 37 percent from 39.6%. The Act cuts income tax rates, doubles the standard deduction but eliminates the personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
While the Act retained seven different tax rates, the actual rates are lower at every level. Therefore, regardless of your taxable income the rate you pay should be less, with the exception of one small window of income. For those taxpayers that have taxable income between $400,001 to $424,950 your marginal tax rate will go up from 33% to 35%. The biggest reduction in marginal tax rates is for taxpayers with taxable income between $237,951 and $315,000. These taxpayers marginal rate goes from 33% down to 24%, a 9-percentage point reduction.
While individual tax rates have generally gone down, the Act significantly changed the deductions portion of the tax code. First, the Act increased the standard deduction for all taxpayers. This means the number of taxpayers that will be eligible to itemize deductions will decrease dramatically. For instance, the standard deduction for those filing as married filing jointly will go from $12,700 in 2017 to $24,000 in 2018. Secondly, for those that do itemize their deductions, many of the itemized deductions have been adjusted downward. Virtually the only itemized deduction that was not changed is the charitable deduction. The state and local tax deduction is limited to $10,000 beginning in 2018. Therefore, for those of you who owe property taxes that are more than $10,000 you should pay those taxes before the end of 2017 so that you can deduct them on your 2017 tax return rather than having them limited on your 2018 return. There is some confusion "out there” regarding this strategy but as long as the taxes have been assessed, you can pay them and deduct them in 2017. In Texas, all property taxes that are currently due have been assessed. You will not be able to pay taxes that have not been assessed.[i]
The Act doubles the estate tax exemption to $11.2 million per person. Therefore, married couples now have $22.4 million in estate tax exemption. This exemption will continue to go up with inflation until 2026 when it is scheduled to revert to the pre-Act levels.
There are many other changes in the Act but these are some of the changes that we believe our clients and friends should know about. Again, you should consult your own tax advisor for how these changes will specifically affect you and your tax situation.
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