What Changes to the Law Are Being Proposed in the Tax Cuts and Jobs Act?

Tax reform has long been a subject of controversy and debate in the political sphere. On November 2, 2017, House Ways and Means Committee Chairman Kevin Brady (R-TX) introduced H.R. 1, otherwise known as the Tax Cuts and Jobs Act, in the latest legislative effort at streamlining the notoriously complex U.S. Tax Code. Whether you are a business owner, a new homeowner, a new parent, or have different economic considerations to plan around, your tax liabilities could be directly impacted if the bill, which would take effect in 2018, is passed. California tax attorneys discuss how the proposed Tax Cuts and Jobs Act would affect individual and corporate taxes, such as tax rates and brackets, credits and deductions, and other key aspects of existing federal tax law.

How Would Tax Brackets and Rates Change Under the Tax Cuts and Jobs Act?

For the average taxpayer, navigating the U.S. Tax Code is an intimidating task rife with pitfalls, confusion, and obstacles. For example, what if the taxpayer accidentally fails to file an important form, or misinterprets the instructions for completing a form? What if the taxpayer is simply unaware of certain reporting requirements? Alternately, what if the taxpayer is unaware that he or she qualifies for certain credits and deductions, whether as an employer, a parent, a homeowner, or all three?

At “best,” the outcome is that financial opportunities to save money or invest smartly are lost – and at worst, the taxpayer could even find themselves under criminal investigation by the Internal Revenue Service (IRS) and Department of Justice (DOJ) for crimes like tax evasion.

Of course, consulting with an experienced tax attorney can ensure that the taxpayer avoids these perils while utilizing the Tax Code strategically. Nonetheless, many taxpayers – legislators among them – feel it is well past time to revise the Tax Code itself, with the end goal of creating laws which will not only be simpler to follow, but will also yield greater financial benefits for the average American.

That is the economic vision encapsulated by the Tax Cuts and Jobs Act as introduced to the House Ways and Means Committee earlier this month. But how, precisely, does the bill intend to achieve these objectives?

To begin with, the bill would significantly shift existing tax rates and brackets, which, as of November 2017, are as follows (for single filers):

  • 10% – $0
  • 15% – $9,525
  • 25% – $38,700
  • 28% – $93,700
  • 33% – $191,450
  • 35% – $424,950
  • 6% – $426,700

If the bill is passed, seven tax brackets would be compressed into just four, while tax rates would consequently change as described below. (Again, these figures reflect tax brackets and rates specifically for single filers.)

  • 12% – $0
  • 25% – $45,000
  • 35% – $200,000
  • 6% – $500,000

The highest bracket of 39.6% would commence at $500,000 of taxable income, while the lowest bracket of 12% would phase out at $1 million. Capital gain rates would not be affected.

Changes to Common Deductions and Credits Under the Tax Cuts and Jobs Act

Whether they come in the form of tax credits (which reduce the taxpayer’s tax liability) or tax deductions (which lower the taxpayer’s taxable income), tax breaks can be utilized to lower expenses and save money, whether for an individual taxpayer, his or her family, or his or her business. For example, many parents take advantage of the Child Tax Credit, which currently allows mothers or fathers to claim a tax credit of up to $1,000 for each child who qualifies.

The Tax Cuts and Jobs Act would make numerous changes to existing tax credits and tax deductions, some of which increase while others would be decreased or repealed. Continuing with the example of the Child Tax Credit, the current $1,000 limit would for certain families be increased, ranging anywhere from $1,000 to $1,600, while a $300 nonrefundable credit would be available through 2022.

How would some other common credits and deductions be affected by the Tax Cuts and Jobs Act?

  • The standard deduction is currently $6,350 for single filers and married taxpayers filing separately, $9,350 for heads of households, and $12,700 for married taxpayers filing jointly and qualifying widow(er)s. If the bill is passed, the standard deduction would approximately double, increasing to $12,200 for single filers and married taxpayers filing separately and $18,300 for heads of households. The standard deduction would change to $12,400 for married taxpayers filing jointly.
  • The mortgage interest tax deduction, which is available not only to homeowners but also those who pay interest on boats, mobile homes, or condominiums, currently allows eligible taxpayers to deduct interest on mortgages up to $1 million. If passed, the bill would lower the amount from $1 million to $500,000.
  • The bill would repeal the following tax credits:
    • Adoption Tax Credit
    • Child and Dependent Care Tax Credit (Employer Child Care Tax Credit)
    • Disabled Access Credit
    • New Markets Tax Credit (NMTC)
    • Plug-In Electric Drive Vehicle Credit
    • Work Opportunity Tax Credit (WOTC)

Of course, this is a non-exhaustive summary that merely scratches the bill’s surface. Among dozens of additional proposed alterations, the Tax Cuts and Jobs Act would also repeal the alternative minimum tax (AMT), make alimony non-deductible, raise the charitable deduction limit from 50% to 60%, and, significantly for many business owners, lower the corporate tax rate from 35% to 20%. Taxpayers are encouraged to read the full text of the bill online, and of course, to track its journey through the House. Having received a 24-16 vote in the Ways and Means Committee, the bill could proceed to the full House for a vote as early as Thursday, November 2017.

Los Angeles, CA Tax Planning Services for Individuals and Businesses

If H.R. 1 falters, a new tax reform bill is likely to take its place. Should the bill succeed, taxpayers will require skilled and personalized guidance to make optimum use of the revised U.S. Tax Code in 2018. As this article should make clear, H.R. 1 could bring numerous and significant changes to federal tax laws, making professional guidance imperative for strategic long-term tax planning.

The Tax Law Office of David W. Klasing provides zealous and meticulous tax planning services for single filers, married couples, business owners, non-residents and expatriates, and foreign companies. Whether you work and reside in California or abroad, our knowledgeable Los Angeles tax attorneys and CPAs can assist with a wide array of accounting and tax matters, ranging from tax preparation, to estate planning, to bookkeeping and accounting services.

Our trusted team of tax professionals brings over 20 years of experience to each matter we handle, enabling our clients to sleep soundly knowing that they are in capable hands. If you have any questions or concerns about a state, federal, or international tax matter, such as failure to file or an IRS tax audit, we encourage you to contact us online or call (800) 681-1295 for a reduced-rate consultation with the Tax Law Office of David W. Klasing.

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