The tax code has not been altered since 1986. President Trump succeeded in his initiative to get passed a tax reform in December 2017. The tax changes do not start until the tax year 2018, meaning when you file taxes, beginning in 2019. The Trump Tax Reform is a conglomeration of tax cuts for both individuals and corporations. Before this tax reform, corporations in the U.S. had been taxed at the highest in the world at 39.5% for the highest corporate income bracket. In some small cases, taxes are increased, such as in the case of limitations on the amount of local and state taxes to deduct. The purpose of tax reform is to stimulate the economy and to make it more attractive for corporations to operate in the U.S. with lower tax rates.
The individual tax rate brackets have been reduced on average by about 3%. The lowest tax bracket is at 10%. The second key change for individuals is the standard deduction which has almost doubled. Single taxpayers now have a standard deduction of $12,000 rather than $6500. Married couples deduction increased from $13,000 to $24,000. The personal exemption has been eliminated. More taxpayers will simply be using the standard deduction rather than the cumbersome itemizing their deductions with receipt tabulation.
For taxpayers who still itemize, SALT or state and local income taxes are no longer deductible in entirety. There is a limit of $10,000 on SALT. The child tax credit doubled from $1,000 to $2,000 per child; however, if you owe no tax liability, then that $2,000 is reduced to $1,400 as a refundable tax credit.
Contrary to popular belief, mortgage interest is still deductible for any mortgage acquired in 2017 and prior years. This has always been applied for up to one million of mortgage debt. For 2018, the one million mortgage limit has been reduced to $750,000 in mortgage debt. The significant change for 2018 is for home equity loans whereby the interest is no longer deductible.
Tax rules for education credits and 401K remain unchanged. A big change for alimony, whereby the party that was paying alimony can no longer deduct the amount. The recipient of alimony no longer declares it as income. For the dreaded federal estate tax, there has been a large change reducing the tax burden for the wealthy. The federal estate tax is 40%, which is a very significant tax rate. For 2018, the tax reform has essentially doubled the exemption amount for estate taxes. If single, the exemption amount jumped to $11,000,000 from $5,490,000. If married, the exemption amount jumped from $10,980,000 to $22,000,000. For people with large assets in real estate or business, this is most favorable to their tax savings regarding inheritance.
In the past, under Obama Care, one would receive penalties if you did not acquire health insurance. These penalties are being phased out under the Trump Tax Reform. Capital gain tax rates are permanently remaining the same, except the tax is indexed for inflation. Moving expense deduction is no longer allowed unless one is in the armed forces. A charitable deduction is still in effect, with a higher threshold at 60% of adjusted gross income rather than 50% of AGI. It is essential to keep in mind, these tax changes under Trump Tax Reform are not permanent. Most are due to expire in the year 2025.
Focusing on the business side of tax reform, the corporate rates have now been significantly reduced to compete with other countries lower corporate rates. The corporate tax rate is now a flat 21%. Previously, these rates ranged from a low tax bracket of 15% to the highest bracket of 39%. This particular tax rate change for corporations is permanent and not expiring in the year 2025.
Tax deferral deductions, other than real property, has been eliminated. This refers to like-kind exchanges where you trade in a used truck for a new one. Since a truck is not considered real property like a building, it is no longer a tax deferral option. Exchanges of like real property, like real estate, could have tax deferral limitations on refrigerators, HVAC, or air conditioning and other assets in the building that are not considered real property.
Finally, there is the topic of 199A deduction of business income which is a complex set of rules. For partnerships, S-Corporations, sole proprietorships, and AG cooperatives, there is a possible 20% full deduction off business income if taxable income is less than $157,500 for a single taxpayer. Married taxpayer taxable income has to be less than $315,000.