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7 Things to Know about the new tax law

Alerus | JAN 18, 2018

If you’re not sure how the new U.S. tax law could affect you, you’re reading the right post. While Alerus does not provide tax or legal advice, we do want to share this summary of insights on key provisions that may affect you. For specific advice, as always, please speak with your tax and/or legal advisor.

1. Individual Tax Brackets Have Changed
There are still seven tax brackets under the new law, but the tax rates and income levels have changed. For a great breakdown of what your tax bracket looks like before and after the new law, head over to Fortune

2. Long-Term Capital Gains and Dividends Not Changed
The tax rates on long-term capital gains and qualified dividends remain unchanged. The rates are:

  • 0 percent for married filing jointly under $77,200; head of household under $51,700; single under $38,600; trusts under $2,600.
  • 15 percent for married filing jointly under $479,000; head of household under $452,400; single under $425,800; trusts under $12,700.
  • 20 percent above these limits.

3. Standard Deduction Increase Means Less Itemizing
Far fewer people will itemize under the new law because the standard deduction is nearly doubling. In fact, the Joint Committee on Taxation estimates that 94 percent of taxpayers will claim the standard deduction starting 2018. About 70 percent used it prior to tax reform.

Standard deduction amounts

Individuals or Married Filing Separately$6,350$12,000
Head of Household$9,350$18,000
Married Filing Jointly$12,700$24,000

4. Buying or Selling a Home?
Previously, homeowners could deduct the interest on a mortgage of up to $1 million or $500,000 for married taxpayers filing separately. Now, anyone who takes out a mortgage between Dec. 15, 2017, and Dec. 31, 2025, can only deduct interest on a mortgage of up to $750,000, or $375,000 for married taxpayers filing separately. 

For buyers in expensive markets, these tax code changes could make home ownership less affordable. For most people, the difference between owning and renting is, from a tax standpoint, now much smaller. Greater competition for lower-priced homes may push people towards the rental market, leading to higher rents. Zillow estimates that only about 14 percent of homeowners will claim the mortgage interest deduction in 2018, down from 44 percent.

5. You Have Children Under 17
The child tax credit will increase from $1,000 to $2,000 per child under age 17. It is also refundable up to $1,400, which means you can still get a partial child tax credit even if you don’t owe tax because your income is too low.

The bill also makes the tax credit more widely available to the middle and upper class. In 2017, single parents can’t claim the full credit if they earn more than $75,000 and married parents can’t claim it if they earn more than $110,000. Those thresholds are increasing to $200,000 and $400,000 from 2018 through 2025.

6. Pass-Through Businesses
Under the new tax code, owners of pass-through businesses will be able to deduct 20 percent of their business income, which will lower their tax liability if they are in a higher individual tax bracket. Pass-through businesses include sole proprietorships, S-corporations, partnerships, and LLCs. C-Corporations don’t qualify. 

The owners of professional service-related businesses (such as lawyers and doctors) earning more than $157,000 for individuals or $315,000 for a married couple filing jointly face a phase-out and cap on their deduction. 

7. Almost Everyone is Now Exempt from Estate Taxes
Before tax reform, only two out of every 1,000 Americans who died paid federal estate taxes. That amounted to $18 billion, or less than 1 percent of U.S. tax revenue in 2016. Under the new law, even fewer people will pay because the estate tax exemption doubles, rising to about $11 million for individuals and $22 million for couples (exact amounts depend on inflation adjustments). In 2026, the exemptions are scheduled to revert to previous exemption levels.

Sources: New York Times, Washington Post, CNN Money, Investopedia, RBC Wealth Management, Tax Policy Center

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