19 Dec

2017 GOP Tax Bill

The 2017 GOP tax bill rolling out of committee has many interesting provisions that will affect many U.S. taxpayers either positively or negatively.

All personal income tax provisions would be effective from 2018 to 2025.  Here are some aspects of the bill that will affect most taxpayers in one way or another.

Obamacare Individual Mandate Penalty

Under the new GOP bill, the penalty is 0.

Tax Brackets

First and foremost, people want to know how the tax brackets in the compromise bill compare to the 2017 tax brackets in effect.

For married filing jointly, here is a comparisons:

New  Old (2017)
Taxable income over But not over Is taxed at Taxable income over But not over Is taxed at
$0 $19,050 10%  $                             –  $                         18,650 10%
$19,050 $77,400 12%  $                 18,650  $                         75,900 15%
$77,400 $165,000 22%  $                 75,900  $                       153,100 25%
$165,000 $315,000 24%  $               153,100  $                       233,350 28%
$315,000 $400,000 32%  $               233,350  $                       416,700 33%
$400,000 $600,000 35%  $               416,700  $                       470,700 35%
$600,000 37%  $               470,700 39.60%

As you can see, the brackets under the new bill are slightly lower, and the bracket amounts are slightly higher.  Thus, the average taxpayer will find themselves possibly in a lower marginal tax bracket.

Personal Exemption and Standard Deduction

The personal exemption would go away under the new bill, and the standard deduction would go way up, almost doubling.  Personal exemptions and the standard deduction combine to make a certain amount of income not taxable.

Based on the change, where a family will start to notice is at the 4 person level – a couple and two dependents.  In the following table, I demonstrate a five person family.  You can see that under the new bill, less of your income will be protected from taxation.

Personal Exemption – per person                                 –                        4,050
Standard deduction – Married filing jointly                      24,000                      12,700
Family of 5                      24,000                      32,950

Child Tax Credit

The child tax credit will increase from $1000 to $2000.  Tax credits are better than deductions, and could make up for the disappearance of the personal exemption for the dependent side of the equation.

State and Local Income or Property Tax

In 2017, if itemizing deductions, state and local property and income tax are deductible for federal income tax purposes.  This will still be true under the new bill, but the cap is $10,000.  This will affect people in high-tax states like California and New York where income tax and property tax can easily exceed $10,000, especially combined.  In states like Idaho, where property tax would not generally be too high for most people, and maybe even not the 7.4% maximum income tax, this may not have much of an impact.

Qualified Business Income Deduction for Pass Through Entity Owners

This is a very interesting topic and would warrant its own blog post, but suffice to say this has the potential to create a significant deduction for some people who are owners in small businesses taxed as S corps or partnerships.

If you have any questions about the tax bill and how it might affect your personal and business situation, I would be happy to help.  Please contact me.