The most fundamental question everyone has about the tax reform bill is simple: Are my taxes going down or up?
While some of the earlier versions of the bill would have created a lot of losers, under what was actually passed, most people will be winners, while a few people will stay about the same. Here are some of the big winning categories:
Jointly filing small business owners with less than $315,000 of taxable income. These taxpayers will get to deduct 20% of their net business income, which will reduce their net income tax by 5-7% in many circumstances. While the 20% business income deduction (under the new Section 199A) continues to apply over $315,000 of income, there are a variety of potential phase-outs that start kicking in at that point, especially for small service businesses like doctors, lawyers, and real estate brokers. Also note that the 20% deduction will apply for most rental activities, although it will often be less useful as many rental activities don’t generate tax income due to depreciation.
Single small business owners with less than $157,500 of taxable income. All the same items apply as for joint taxpayers, but this will be a little less useful in some situations because of the lower ceiling before the phaseout tests come into play at $157,500 of taxable income.
Middle income families with multiple children. Although personal exemptions are going away starting in 2018, the child tax credit has been doubled from $1,000 to $2,000. Critically, the threshold where the child tax credit phases out has been increased from $110,000 on a joint return all the way up to $400,000 ($200,000 for single filers). This means that a lot of upper-middle-class filers who didn’t previously get the child tax credit at all will now get a big credit, well in excess of the tax benefit of the lost exemptions.
People who didn’t itemize before. Without considering dependents, the increase in the standard deduction is about $2,000 per filer than the loss of personal exemptions. It’s an easy savings of $300-$700 for single taxpayers; double that for married taxpayers.
There are more provisions that go into determining whether or not any particular taxpayer will see a big benefit or not from this reform bill -- contact us today if you want to talk through the implications of the changes!