The Tax Cuts and Jobs Act was signed into law in December 2017. (1) According to experts, this law represents a significant modification of the existing tax law. Without any doubt, this law has an impact on tax planning for this year and that’s why it is crucial to have a professional tax expert on your side.
This is one of those laws that affect both individuals and businesses. The main accent is placed on the businesses, but millions of Americans will be affected too.
What can business owners expect from the Tax Cuts and Jobs Act?
First of all, they can expect a major reduction in corporate tax rate. At this moment, the United States has a corporate rate set at 35% which makes it one of the highest rates for this type of tax in the world. Thanks to this new bill, the rates will fall down to 21% making our country more competitive on the international market.
In addition, this bill will affect the multinational companies too. With the help of these changes, multinational corporations will be encouraged to bring their capital back to the United States instead of keeping it abroad. It’s also good to mention that the Tax Cuts and Jobs Act will allow businesses to deduct the cost of interest on loans for business activities at 30% of income. Of course, this monumental tax reform will bring other changes that should support the domestic companies.
What can individuals expect from the Tax Cuts and Jobs Act?
Just like the previous law, this one keeps the seven distinctive individual tax brackets. The only thing that has changed is the tax rates. Generally speaking, most people will pay less, although there are some people that will have to pay more in taxes.
In addition, the new bill modifies the income thresholds designed for each individual bracket. This makes the savings even greater. For instance, the highest rate (37%) is for individuals who have an annual income of more than half a million dollars. Last year, the highest rate was 39.6% and it applied to those who earned over $418.000 annually.
Another thing that taxpayers should be aware of is that the majority of itemized deductions are removed from the new law. For examples, the itemized deductions for things like investment expenses, alimony payments, personal casualty losses and tax preparation expenses are removed.
The home mortgage interest deductions are affected too. The Tax Cuts and Jobs Act sets a limit to the mortgage interest deduction – $750.000. In the past, this limit was set at one million dollars. Additionally, interest on home equity loans is not deductible anymore. Also, people who have estates worth up to 11 million dollars will be exempt from the federal estate tax. The previous law had a different limit – 5.5 million dollars. (2)
Just like the law before, the new Tax Cuts and Jobs Act has some pros and cons. It is up to every business and individual to use the incentives and benefits that this law brings. Using the help of a professional accounting and income tax service provider like TaxPM is always a smart move.