GOP Tax Reform Highlights

In an effort to simplify our current tax system, The GOP has proposed some new tax legislation aimed at providing tax relief to the American middle class. Below are some key points of the tax reform and how it may affect you and your family

Tax Brackets

The number of tax brackets will decrease from seven to four, as shown below:

Standard Deduction

The standard deduction, for taxpayers who elect not to itemize their deductions, will be increased from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for couples filing jointly. This benefit is partially offset by the elimination of the $4,050 per-person personal exemption.

Millennials and mainly the younger generation will benefit from the reform as they are less likely to itemize deductions. Families with dependents/children who take advantage of multiple personal exemptions may be disadvantaged by the new plan.

Mortgage Interest Deduction

The IRS currently caps mortgage interest deductions for home loans at $1 million. The tax reform will adjust the mortgage interest cap down to $500,000. This is unfortunate for Californians as most mortgages normally exceed the cap of $500,000.

State and Local Taxes

Deductions for state and local income and sales tax will be disallowed. This is unfortunate news for Californians as we pay the highest state income tax rate in the country.

Property tax deductions are now capped at $10,000. Depending on your county’s effective property tax rate and the value of your home, the cap may or may not have an impact on your taxes.

Estate tax

For 2017, the estate and gift tax exemption is $5.49 million per individual. The new bill will nearly double this existing exemption to $11 million for individuals and $22 million for couples in 2018.

Tax Rate for Pass-Through Entities

By nature, pass-through entities or companies structured as S-Corps or Partnerships are taxed at the individual taxpayer level. Under current tax legislation, any earnings from this type of a business flows to the business owners’ personal tax return and is taxed at a rate no greater than 39.6%. The tax reform is lowering the maximum tax rate paid from 39.6% to 25%. We anticipate this reduction will provide relief to some small business owners and professional service oriented industries that are normally set up as pass-through entities such as: law firms, CPA firms, real estate firms, etc.