Tax Season

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The Tax Cuts and Jobs Act made major revisions to the U.S. tax code for both individuals and businesses. The bill represents the most significant tax changes in the United States in more than 30 years.

Tax brackets are usually the most discussed topic in any tax change analysis. Shown below are the new brackets and rates:

2018 Brackets.PNG
2017 Brackets.PNG

The more significant changes were those to the standardized deductions. The standard deduction is an automatic reduction in a tax payer's tax obligation. US taxpayers have an option of either taking the standard deduction or itemizing their deductions by identifying and calculating specific expenses one by one. This is a time consuming process. It is only "worth it" if the itemized deductions exceed the amount of the standard deduction by some meaningful amount. Increasing the standard deductions as shown below simplifies the decision and filing process for many. 

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2017 Deductions.PNG

Other significant changes include:

  • Raising the income threshold for the Child Tax Credit to $400,000 for married taxpayers
  • Limiting the total mortgage interest deduction to mortgage debt up to $750,000 and capping the total deductible amount for state and local taxes (both sales and property) to $10,000
  • Eliminating the penalty for not buying health insurance
  • Raising the Alternative Minimum Tax exemption and increasing the phase-out income to $1 million for joint filers.
  • A 20% deduction for most types of pass-through business income.

Taken as a whole, the tax bill simplifies the filing process for many by slashing the number of people for whom itemizing is worthwhile. On the business side, it levels the playing field be removing many of the special loopholes that allowed some larger companies (who could afford lobbyists) to pay fractions of what small service companies paid. These smaller companies account for the majority of job growth. So, the tax overhaul ispositive for jobs and wage growth.

(Additional investment specific commentary follows for client subscribers)

References:

https://www.fool.com/taxes/2017/12/29/your-complete-guide-to-the-2018-tax-changes.aspx
https://20somethingfinance.com/tax-brackets/

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