Tax Changes and their impact on You (Part 2)

Continuing on from my last post, let’s take a look at some of the other changes that will have an impact on our personal taxes:

2. Personal Exemptions vs. Standard Deduction

There has been a lot of excitement about the Standard Deduction being doubled. However, it needs to be put in context. The Standard Deduction may have been doubled, the Personal Exemption has been eliminated. The table below shows an example comparing the old tax system against the new.

These are just two examples. We haven’t factored in itemizing, or extra members of the household (i.e. children). In general it does appear to be more generous. However, it doesn’t appear to be quite as generous an increase as it may have been originally suggested. This combined with the changes in the tax brackets may have a significant impact on a person’s taxes.

3. Family Tax Credits

The child tax credit will be doubled, from $1,000 to $2,000, and the refundable portion of that credit will be allowable up to $1,400. The act also will grant a new credit of $500 for other dependents. These will phase out at income limits of $200,000 (single) and $400,000 (married).

4. Capital Gains

Capital gains rates haven’t changed. They are still at 0% for those in the 10% and 12 tax brackets, 15% for those in the 12% to 35% tax brackets, and 20% for those in the 37% tax bracket.

5. Estate and Gift Taxes

Effective January 1, 2018, the individual unified gift and estate tax exemption will be raised to $11.2 million (up from what was set to be $5.6 million), and, with portability remaining intact, $22.4 million for a married couple.

This is very good news to those vineyard and winery owners and their families in areas, such as Napa and Sonoma, that have seen significant increases in the value of their family estates.  

The top rate will remain 40 percent. The new rates are set to expire—and return to 2017 levels—at the end of calendar year 2025. (Therefore, if you believe your estate may be impacted by a return to the previous levels, consider doing some estate and gift planning before then.)

6. Corporate Taxation

Although the changes to how individual income is taxed are set to expire at the end of 2025, the corporate tax changes provided for in the TCJA will be permanent. One of the largest tax cuts in the legislation will lower the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Furthermore, the TCJA will completely repeal the corporate AMT. The act will also impose some limitations on certain corporate tax deductions, including those for net operating loss, business interest, and R&D expenditures.

The implication here is that if your business is structured as a “pass through” entity such as a S-Corp, Partnership or LLC, and you expect to be in the new 22% personal income tax bracket or above, you should consider consulting your tax advisor regarding your specific situation.