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The New Tax Law and You

by in Trusted Advice

On December 22, 2017, the President signed into law the Tax Cut and Jobs Act (TCJA) and sent people and CPA's scrambling to make sense of it all.  We are not tax experts, and you should always check with your tax preparer, but we wanted to highlight some of the major changes and possible implications for you.  While the reduction in US Corporate taxes from 35% to 21% received the most headlines, there were many changes to individual taxes.  Some of the main changes are:

  • Tax rates were reduced and tax brackets were changed.  The top rate went from 39.6% to 37%, with other rates also dropping.  In addition, the ranges for each bracket were changed.  So while the taxes you owe should go down, the exact amount of the reduction will depend on where in the new brackets your taxable income falls.
  • The State and Local Tax (SALT) deduction was capped at $10,000 for any combination of either state and local property taxes, or state and local income taxes or sales taxes.  While this does not affect most taxpayers in the rest of the country, taxpayers in high tax states such as New Jersey, New York, California, Connecticut and Massachussetts could be.
  • The Standard Deduction was almost doubled to $12,000 for individuals and $24,000 for joint filers.  This may allow some filers to stop itemizing deductions.
  • Exemptions for dependents were eliminated.
  • The Child Tax Credit (for children under 17) was doubled from $1,000 to $2,000.
  • Alternative Minimum Tax (AMT) exemptions and phaseout levels were greatly increased and indexed for inflation.  A big benefit for high earners.
  • Mortgage interest can now be deducted only on mortgages of up to $750,000 (down from $1,000,000).  Potentially a limiting factor for high end real estate.
  • 529 Plans can now be used to pay for private high schools, instead of only for college, greatly increasing their usefulness.

And those are just the highlights.  There were also changes to retirement savings contribution limits, income limits for Roth IRA contributions and fully deductible IRA contributions, capital gains income ranges and estate and gift tax exemptions.  For a handy summary sheet, send us a message using our Contact Form.

Here in New Jersey, where we have both high real estate taxes and state income taxes, the focus has naturally been on the elimination of the SALT deductions. While this is obviously concerning, it may not be as bad as it looks, as there may be offsetting factors in the other changes to the law.  For those with low income, but high property taxes, such as retirees, the doubling of the Standard Deduction may offset or even exceed the lost SALT deduction.  On the other hand, high earners were already subject to phaseouts of the standard deductions, personal exemptions, and the AMT, which eliminated many of their deductions in any case.  The much higher exemptions ($109,400 for Joint and $70,300 for individuals) and phase out levels ($1,000,000 for joint and $500,000 for individuals) in the AMT, combined with lower rates could offset some of this. This is just one example of the many facets of the new law's changes.  Since each person's situation is unique, we would recommend you talk to your tax adviser to go over how you might be affected. 

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Guest Sunday, 29 March 2020