With the Tax Cuts and Jobs Act recently signed into law, you’re now doubt wondering how this 2017 tax bill will affect your future taxes and wages. Infinity Financial Services in Oakland takes a closer look at how the bill will impact individuals/households and businesses in the Bay Area.
The top corporate tax rate – that is, the one which applies to publicly-traded companies – drops from 35% to 21% in 2018. Also, the new tax bill means significant changes for “pass-through” businesses, which are businesses that don’t file taxes as an entity (i.e. a brick and mortar business), but see their taxes passed through to the owner’s individual tax return. Most of these businesses are small businesses: sole proprietorships, limited liability companies, and the like. Under the new law, business owners can deduct 20% of their pass-through income before the income is taxed at the applicable rate.
Regarding social security, employees who paid 6.2% in social security taxes on each paycheck last year will pay 4.2% in 2018, applicable to yearly incomes up to $106,800. Also, the 2018 tax bill ushers out several deductions that some businesses and workers were accustomed to claiming, such as:
- Unreimbursed employee expenses
- Tax preparation expenses
- Moving expense
- Casualty and theft losses
- Employer-subsidized parking and transportation reimbursement
Individuals/households in Oakland shouldn’t expect to see much in the way of 2018 tax changes, compared to years past. Instead, noticeable impact will come in 2019, when after-tax income will rise once the law is fully in effect. The lowest taxpayer level (those making less than $25,000 annually) will see an extra $90 in their wallet, a 0.4% increase in after-tax income. Middle-income families (those earning $49,000 - $86,000 per year) will receive on average a $900 tax cut, equivalent to an after-tax income bump of 1.6%.
Moving into the higher-income tax brackets, people and families whose incomes range from $308,000 - $733,000 can expect a tax cut of around $13,500 per year, which is a 4.1% increase over the previous tax plan. And in the highest tax bracket (those whose income exceeds $733,000), after-tax income will rise by 3.4%, for an average tax reduction of $51,000.
One part of the new tax bill that greatly impacts homeowners is a new $10,000 cap on deductions for state, local, and property taxes combined. Under the previous tax law, there was no such cap included on federal tax returns.
The new tax bill affects the estate tax too. Instead of a 55% tax on inheritances of $1M or more that was scheduled to take effect on Jan. 1, 2018, the new tax bills reduces the percentage to 35% and raises the threshold to inheritances of $5M or more. Another staple of the old tax plan, the so-called “marriage penalty”, has mostly been done away with. In the past, two people who married could see themselves moved into a higher tax bracket based on combined income. This is no longer the case, as each person’s income is considered separately.
What we’ve covered here is just a cursory overview - there’s much more to know about the Tax Cuts and Jobs Act and how it could affect your individual/household and business taxes. Contact Infinity Financial Services for more information and to begin discussing effective tax planning near Oakland.