Source: With Tax Code Reform signed into law, there are a number of changes to be aware of. We review the biggest changes to the tax code that have been made since the last set of revisions that were made in 1986. Sam Burlum reviews some of the most significant changes to the tax code that affect the average tax payer.
The largest reform to the current tax code since 1986 was enacted into law at the end of 2017. This reform has come with mixed reviews by skeptics, who sought more resolve to the existing tax code laws. Most of the adjustments to the tax code have been on the personal tax side of the books. Some of the most noticeable changes include:
- The Child Tax Credit increasing from $1000 to $2000, so families can benefit from this adjustment, which leaves more of the wage earner’s money on the table at home.
- A significant change to the Individual Tax Rate and Bracketing. Prior to the change, there were six specific brackets in which personal income tax was rated. The 2017 tax code reform has added additional brackets with adjustments to existing brackets. These changes were minimal, however for some wage earners, the changes can mean having a few extra dollars in their pockets for their families.
- An increase in the standard deduction from $12,700 to $24k for married filing joint couples. The standard deduction has increased from $6350 to $12,000 for single filers. The head of household deduction has increased from $9350 to $18,000.
- Good news for the small business owner. Small business owners that operate pass through income corporations (S Corps or LLC) were formally taxed at the individual tax brackets. These same pass through corporations now receive an added twenty percent deduction bonus. A benefit for C-Corporations has also been worked into the bill. C-Corporations will see a reduction from a thirty-five percent tax rate to twenty-one percent flat, giving corporations the largest adjustment to corporate tax in decades. In addition to a change in corporate tax rates, the Alternative Minimum Tax (AMT) for corporations has been repealed.
- Changes to personal exemption allowances. Formerly, the personal exemption allowance was up to $4050 per person, however since the new tax code is in place, this exemption has been eliminated. To compensate for this, an increase in the standard deduction has been implemented.
- A cap in SALT (state and local tax) deductions. Some property owners may not fare well in the new tax code deal. State and local income tax was formerly deductible prior to tax code reform; however, in accordance with the new tax code, this deduction is now capped at $10,000 in total between both property and income taxes. Some say this hurts property owners who relied on the former allowance to offset the pain they felt when paying heavy burdens on their state and local property taxes.
- Adjustments to the mortgage interest deduction. In 2017 it was allowable to deduct the interest up to $1 million dollars on your main residence. The new code drops this deduction to $750,000 for new loans that are generated in 2018 and forward.
- Added benefit for individuals that have 401ks. Such investors have plenty to be happy about. As the new tax code specifies, the cap on employer-sponsored 401k programs has been increased by $500. This also allows for anyone over the age of 50 to contribute up to $24,500 into their 401k. On the other side of the coin, deductions for IRA’s will be phased out. However, some exemptions on this plan will still be allowed. Other adjustments and phase outs include Roth IRA exemptions and deductions.
- An increase in Earned Income Tax Credit maximums. This tax code rule was increased to assist families with multiple children. Though the increase is not a landmark, the modest increase was made to help struggling families.
- An unexpected surprise in the area of gifting. An individual can now provide a gift up to $15,000 to any one other person without the receiver having to deal with a tax liability.
- An increase in the maximum Social Security taxable earnings amount, which affects employees, employers and the self-employed.
So which states benefited and which states were most affected by the new tax code reform? For low income families, the states that receive the least amount of benefit include Alabama, Pennsylvania, Montana, Wyoming, and Vermont. States that received the most benefit for low income families include District of Columbia, Arizona, Nebraska, Texas, and California.
As it relates to middle class family demographics, the states that received the most benefit include Alaska, Nevada, New Mexico, Delaware, and California. Middle class families on the other side of the spectrum in the states of Maine, Maryland, Connecticut, West Virginia, and Arizona lose out on this round of tax code reform.
For high income families, the states of Alabama, Tennessee, Wyoming, Arkansas, and Ohio gain the most from tax code reform. The wealthiest in the states of Mississippi, California, New Jersey, New York and Arizona stand to lose the most with the new tax code reform bill.
To find out how the tax code reform directly affects you, refer to your tax attorney or certified public accountant for additional information. This article was not intended to provide tax or financial advice, but to provide awareness by highlighting some of the most noticeable tax code changes.
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