8 More Things to Know about the Tax Cut and Jobs Act (TCJA)
Updated: Jul 7, 2020
1. Child Tax Credit – The expanded child tax credit under the new plan will certainly affect the household budgets for many families across the nation. Under the new plan, the Child Tax Credit (CTC) increases from $1,000 to $2,000. The income levels at which the credit phases out (i.e., the point at which the $2,000 credit begins to decrease) has also increased to $400,000 for married taxpayers filing jointly which effectively now makes the credit available to high earners.
2. State and Local Tax (SALT) – The new tax plan will cap the federal deduction for tax paid to state and local governments at $10,000 of taxable income. Taxpayers in states with high tax rates such as California (13.3%), Minnesota 9.9%, the District of Columbia (8.95%) and New York (8.82%), will feel the pinch the most as the bill also prevents taxpayers from preparing their state income taxes in 2017 to avoid paying more in 2018.
3. Estate Taxes – The estate tax exemption has doubled and now shields the first $11.2 million bequeathed to a decedent’s heir. Viewed as a double tax that handicaps family-owned business, the new bill will affect less than 1% of households earning more than $500,000. The results of this change are speculative however considering that despite the number of estate tax returns declined over 67 percent (from about 38,000 to 12,411) in 2016 primarily due to a $2.0 million increase in the tax shield to $5.45 million, the total net estate tax reported on all estate tax returns in 2016 was nearly $18.3 billion.
4. Capital Gains – Under the current plan, three capital gains tax rates exist starting with a 0% rate for taxpayers with capital gains who fall in the two lowest income brackets followed by rates of 15% and 20%. The new plan, while maintaining the three-bracket setup, now applies the tax rates to the following maximum taxable income level table:
Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly
0% Up to $38,600 Up to $77,200
15% $38,600-$425,800 $77,200-$479,000
20% Over $425,800 Over $479,000
Head of Household Married Filing Separately
Up to $51,700 Up to $38,600
Over $452,400 Over $239,500
5. Carried Interest – Carried interest, or the recognition of a general partner’s income stemming from an investment fund, was due to expire in 2018. The bill allows the investors in the private equity, market to pay capital gains taxes, not income taxes, on the income they recognize on their investments. With the private equity markets currently booming, this was a welcomed provision on bill by many investors.
6. Mortgage Interest – The new tax plan will limit the deductible amount of mortgage interest to $750,000 down from $1 million. Fortunately for many high net worth taxpayers, the bills’ provisions are prospective which means old debt will be grandfathered in under the new code.
7. Student Loan Interest Deduction – Even the Obama administration proposed repealing the student loan interest deduction which allows taxpayers with (modified) adjusted gross income under $80,000 ($165,000 if married) to deduct up to $2,500.00 from their gross income. With the student loan debt reaching $1.2 trillion in 2017, many Americans would have perhaps preferred this deduction to go up, not out.
8. Kiddie Tax – The Kiddie Tax meant that unearned income above $2,100 (dividends, interest, rental income, etc.) of children would be taxed at their parents’ rate (regardless of whether the child was claimed as a dependent on the parents’ return. The Kiddie Tax, which essentially closed a tax loophole where wealthy parents could shift income to children at a presumptively lower rate, has been (somewhat) re-opened. Now, instead of the child being taxed at their parents’ rate, they are now taxed at the rate of unearned income that is applied to estates and trust.
The Tax Cut and Jobs Act (TCJA) is more than 500 pages long. Do yourself a favor and don’t try to tackle it alone. Contact us today (248) 845-8015 to help you navigate the new tax landscape.