Tax Cuts and Jobs Act

The new tax law took effect on January 1st, and it is a big win for the American taxpayer. It is too big to cover in one post, so we will be discussing various provisions throughout the year. You will feel it immediately both in your federal withholding and in your quarterly estimated tax payments. The basics include:

  • Rate cuts for all brackets
  • A doubling of the standard deduction
  • A doubling of the child tax credit and a raising of the phaseout starting at $400,000 for MFJ (married, filing jointly)
  • The exemption for the AMT (alternative minimum tax) is increased to $109,400
  • The phaseout begins at $1M for MFJ
  • The phaseout of itemized deductions is gone
  • The unified credit for estates and gifts is doubled to $11.1M per person and the 40% rate stays the same

High income individuals that live in high tax states such as NY, NJ, and CA will not get much of a break. The rate reduction is significantly offset by the fact that they cannot deduct the high state and local taxes that they previously deducted. Say you make $2M and pay $100,000 in state and city tax and then save $40,000 in federal income tax. Now, that deduction and the tax savings are gone, so you cannot say this is a windfall for the wealthy. It is also good economic policy because it does not subsidize high tax states at the expense of the American taxpayer in low tax states. The $10,000 limit on the deduction of state and local tax does not apply to your business or other income producing property.

Regular corporations are getting a rate reduction from 35% to 21%. You may have noticed the stock market is factoring in the new bottom line. Also, foreign profits held overseas are being deemed repatriated at a rate of 15.5% for cash and 8% on other assets. The market gets to figure the effect that will have on values also. For S Corporations, sole proprietors, LLCs, and partnerships, there is a 20% deduction based on the lower of three amounts which is designed to achieve parity with the C corporations. This 20% break is phased out for professional service firms with taxable income between $315,000 and $415,000 for MFJ. The section 179 deduction is being doubled to $1M and bonus depreciation is being increased to 100%. My advice is get in the market.

This is all for today.  If you need more information, please feel free to give me a call at (713) 785-8939 or leave a comment on this post.

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