In December 2017, the Tax Cuts and Jobs Act (TCJA), which represented the most significant federal tax code overhaul in the last 30 years, was signed into law. The changes instituted by the TCJA affect both individual taxpayers and businesses in a number of different ways, primarily by reducing individual income tax rates, doubling the standard tax deduction and eliminating a variety of personal tax exemptions. For help understanding how these changes could affect you or your estate plan, please contact a dedicated tax law attorney who is well-versed in both state and federal law today.
Individual Income Tax Rates Reduced
One of the most impactful changes made by the TCJA was the reduction of individual income tax rates. While the new law retained the prior structure of seven (7) separate income tax brackets, it also lowered the tax rate percentages for each bracket. For instance, the top rate for single filers, or those who earn more than $500,001 per year fell from 39.6 to 37 percent, while the rate for taxpayers who earn between $200,001 and $500,000 will remain at 35 percent. The changes to the remaining tax brackets for single filers are as follows:
● A reduction in the rate for those who earn between $157,501 and $200,000 to 32 percent;
● A lowering of the rate for those who earn between $82,501 and $157,500 from 28 to 24 percent;
● A reduction in the rate for those whose income falls between $38,700 and $82,500 from 25 to 22 percent;
● A reduction in the rate for those whose income falls between $9,526 and $38,700 from 15 to 10 percent; and
● The retaining of the rate for those whose income is no higher than $9,525 of 10 percent.
Finally, the tax rates for the unearned income of minor children have changed, as they are no longer affected by a child’s parents’ tax situation. These changes are temporary and set to expire after 2025.
Standard Tax Deduction Doubled
In addition to reducing the income tax rates for many taxpayers, the TCJA also increased the standard deduction from:
● $6,500 to $12,000 for individual tax return filers;
● $13,000 to $24,000 for those filing joint tax returns; and
● Businesses and company inventory, including accounts receivable and equipment; and
● $9,550 to $18,000 for taxpayers who file as heads of household.
While these amounts will continue to be indexed every year for inflation, the measure used for indexing was changed from the consumer price index for all urban consumers, also known as CPI-U, to the chained CPI-U, which is considered a more accurate measure, although it does result in smaller upward adjustments.
Personal Exemptions Eliminated
Under the TCJA, taxpayers will no longer be permitted to claim a personal exemption deduction of $4,050 for themselves, their spouses, or their dependents in order to reduce the amount of their income subject to taxes, at least through 2025. Fortunately, the doubling of the standard deduction and changes to the Child Tax Credit will offset at least some of these losses, and in some cases, could even result in a larger refund. For instance, the Child Tax Credit was increased from $1,000 to $2,000 per child.
Call a Tax Law Attorney Today
To schedule a free consultation with one of the tax representatives at Orlowsky & Wilson, Ltd. Attorneys at Law, please call 847-325-5559, or complete one of our brief online contact forms today.