The current Tax Cuts and JobsAct proposal is seeking the biggest transformation of the U.S. tax code in more than 30 years. It aims to permanently reduce the corporate tax rate from 35% to 20%, compress the number of individual income tax brackets, and repeal the taxes paid by large estates starting in 2024. Although there was talk of changes to the pre-tax limit of 401(k) contributions, the draft Act had no changes to 401k plans. The proposal is attempting to simplify the current tax code. How will this affect us?
The proposal would reduce the number of marginal income-tax rates from seven to four: 12%, 25%, 35% and 39.6%. The proposal preserves the current top rate, but it would affect fewer households than it does currently. Here is the breakdown of the income ranges:
- 12%: For single filers, this rate applies starting at $12,200 of taxable income. For those married filing jointly, it begins at $24,400.
- 25%: Begins at $45,000 for single filers; $90,000 for married joint filers.
- 35%: Begins at $200,000 for single filers; $260,000 for married joint filers.
- 39.6%: Begins at $500,000 for single filers; $1 million for married joint filers.
Under the proposal, the standard deduction would be increased to $24,400 for joint filers (and surviving spouses) and $12,200 for individual filers. Single filers with at least one qualifying child could claim a standard deduction of $18,300. These amounts would be adjusted for inflation based on chained Consumer Price Index.
Individuals would not be allowed an itemized deduction for state and local income and sales taxes. However, they would be allowed deductions for state and local taxes on business income. Taxpayers can continue to claim an itemized deduction for property taxes, with a cap of $10,000.
The proposal halves the cap on mortgage interest deduction. It caps the deduction on mortgages up to $500,000, down from the current $1 million limitation. Interest would be deductible only on a taxpayer’s principal residence. The alternative minimum tax would be repealed.
In the coming weeks we will have more clarity on the Act. I will provide an update at that time.
Information in this material is for general information only and not intended as investment, tax or legal advice. The information set forth in this communication may not develop as predicted. Tax laws can change at any time and may impact your benefits. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.
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