It is said that the only certainties in life are death and taxes. Confusion over taxes and tax reform can be added to that list. Here are a few highlights of how you may be impacted by the new Tax Reform Bill.
Income Tax Brackets
The new law maintains the current seven tier structure for individual brackets with reductions in rates for most brackets. The top rate goes down from 39.6% to 37% and 5 out of 7 of the brackets are reduced by 1-4%. This means there is a good probability you will be getting a raise with each paycheck beginning in February 2018. What you choose to do with these funds should be part of your financial planning for 2018. How can you put these dollars to work FOR YOU?
Standard Deduction and Personal Exemption
Beginning in 2018, the tax reform eliminates the personal exemption which is currently set at $4,050. The impact of this is offset for many people because the law nearly doubles the standard deduction for a single filer from $6,350 to $12,000 and for married filing jointly it goes up from $12,700 to $24,000. For those who claim the standard deduction (rather than itemizing), whether this will increase or decrease your tax bill depends upon a number of factors, including your tax status and your number of children. Under the new tax reform, more people will qualify for the child tax credit because it increases the income level before it begins to phase out. This is another opportunity to identify if you will have savings and create a new purpose for those funds that benefit your long term finances.
Filers will still have the option to choose between itemizing expenses and taking the standard deduction. It is estimated that currently 70% of filers take the standard deduction and experts expect that number to increase under the current tax reform laws. For those who do itemize, there are a variety of changes to consider. From reduction in the income threshold for deducting medical expenses (filers will have to spend less on medical before it becomes deductible) to changes in deductibility of state and local taxes (amount deductible is capped) and increases to the exempt amounts for estate taxes (exemption amount doubled), it is important to consult with a tax expert to understand which changes apply to you.
Tax Reform For Businesses
In addition to the reduction in corporate tax rates from the highest bracket being 35% to a flat rate of 21%, business owners have several changes under the current tax reform to take into account for 2018 and beyond. Tax payers such as sole proprietors, S-Corporations and partnerships will benefit from the tax reform with a 20% deduction for pass through qualified business income. The calculation for this deduction can get complicated in certain circumstances so make sure you have your tax advisor review it with you. In addition, businesses will get additional benefit from taking immediate expense for certain types of capital investments that previously would have been required to be depreciated over time. There are also changes to net operating loss carryback and carryforwards that business owners need to be aware of.
While there has been controversy in the media about whether this tax reform will create relief or additional burden for individuals there has been no argument that it will certainly impact practically all Americans and businesses in some capacity. Remember that not all of the changes are permanent.
As you see your taxes reduced, it is important to create a plan to use the additional income you receive to help benefit your financial future….like reducing your bad debt or starting to invest the additional dollars for your future.
To ensure you are getting the most benefit from current tax laws, consult with an expert that is qualified to support you in retaining your money so you can put it to work for you and your family!