Ok, now that the new tax bill has been passed by Congress and signed into law by President Trump how will it affect us? Will it mean paying more or less in income tax? The answer depends on many variables but one thing is for sure. These changes don’t apply until 2018, meaning that you won’t have to worry about the new law when filing your 2017 income tax returns this coming spring.
We will be experiencing the greatest overhaul of the tax laws in more than 30 years, the last major changes having been made under President Reagan in 1986. If you have followed the many reports in the media as the bill made its way through both Houses of Congress, you know that both corporate tax rates and personal income tax rates will drop. There are also other changes which limit or eliminate personal deductions.
However, while the changes that affect corporate tax rates are permanent, the changes that affect individual tax rates and deductions are not. There is a “sunset” provision in the law, meaning that the new law – as it applies to individuals – will expire on December 31, 2025. That is, unless Congress agrees to extend the law. That, of course, will depend on the political and economic climate 8 years from now, including whether the economy responds the way Republicans say it will.
Nevertheless, let’s take a look at the changes that are likely to affect the average senior. First of all, the tax rates have been lowered a bit. There are still 7 tax brackets but the rates have changed with the top rate lowered from 39.6% to 37% and the threshold at which each rate is reached has been altered. (The corporate rate reduction is much greater, from 37% to 21%).
Some of the most significant changes relate to deductions. The standard deduction has been doubled to $12,000 for a single person and $24,000 for married couples but personal exemptions have been eliminated. The deduction for state and local taxes will be capped at $10,000, something that will hurt many New Jersey residents and especially New Jersey homeowners because we have high real estate and state income taxes. Both of those fall within this provision.
If you are thinking of prepaying 2018 state income tax in 2017 so you can still get the deduction one more year think again. The new law says that you cannot take a deduction in 2017 for any income tax due for 2018 and beyond. (You can, however, prepay your real estate taxes for next year and get the deduction for 2017 but you should check with your tax advisor to see if that will actually save you money.)
Next week we’ll discuss a few more changes and then how they will impact seniors.