Tax Cuts and Jobs Act: Individual Income Taxes

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The new tax law makes substantial changes to the individual income taxes. Most taxpayers will end up paying less tax, but some will not have any benefit. Indeed, depending on individual circumstances, some people will end up paying more income tax under the new law.

The changes in the individual income tax are subject to a December 31, 2025 sunset provision. Unless Congress votes to extend the new law, the old tax regime will return.

This sunset provision was added in the Senate to address a technical procedural issue that permitted the tax law to be passed with a simple majority vote and no filibuster. Changes in the corporate tax code are not subject to any kind of sunset provision, but like everything remain subject to any future change in law passed by Congress.

The major changes to the US individual tax code are summarized below.

Lower Tax Rates

Both the tax rates and the income brackets to which they apply have been changed. The top marginal tax rate, which applies to income in excess of $600,000, has been reduced from 39.6% to 37%. The rates for all brackets below $400,000 have been reduced. In the $400,000 to $500,000 range, rates are the same or a bit higher, resulting in somewhat higher taxes for certain single filers. The vast majority of people, depending on their deductions, will experience a tax cut.

The chart below summarizes the changes for both single and joint filers.

Taxable Income Single Filer: Old Tax Single Filer: New Tax Single Filer: Change Joint Filer: Old Tax Joint Filer: New Tax Joint Filer: Change
$50,000 $8,150 $6,946 ($1,204) $4,643 $3,714 ($929)
$100,000 $20,839 $18,296 ($2,543) $16,308 $13,879 ($2,429)
$200,000 $49,067 $45,699 ($3,368) $42,624 $36,579 ($6,045)
$400,000 $115,067 $115,699 $632 $106,727 $91,379 ($15,348)
$500,000 $152,940 $152,165 ($175) $142,148 $126,380 ($15,768)
$1 mm $350,940 $327,165 ($23,775) $340,148 $309,380 (($30,768)

Source: Calculated by The Informed Vermonter using old and new tax rates/brackets

The tax table above is based on “taxable income”, which is derived from provisions of the tax code that exclude certain types of income and permit deductions of certain types of expenses. These items have also been materially revised in the new tax law. So, while tax rates have declined, the “taxable income” to which they apply may be higher of lower depending on the changes outlined below.

Increased Standard Deduction: The Standard Deduction has been increased from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for joint filers. About 70% of taxpayers use the Standard Deduction instead of itemizing deductions.

Elimination of Personal Exemption: The $4,000 Personal Exemption that applies to husband, wife and all children is now gone. Anyone with a child will therefore loose the benefit of the increased Standard Deduction. A married couple with two children claiming the Standard Deduction will now have $5,000 MORE taxable income (Standard Deduction up $11,000, Personal Exemptions down $16,000).

Child Tax Credit: This has been raised from $1,000 to $2,000, with the refundable portion increased from $1,000 to $1,400. The phase-out threshold for this tax credit has also been raised from circa $200,000 of taxable income to $400,000. This more than offsets the loss of Personal Exemptions for taxpayers in the 25% tax bracket or lower.

Reduced Mortgage Interest Deduction: The interest deduction can now only be taken on the first $750,000 of mortgage, down from $1,000,000. Interest on home equity loans cannot be deducted at all.

Reduced Deduction for State & Local Taxes: State and local income taxes and property taxes were fully deductible under the old tax code. Now, the deduction for these items is limited to $10,000 in the aggregate.

Eliminated Deductions: Employee Business Expenses, Tax Preparation Fees and Investment Interest Expense deductions have all been eliminated.

Adjustments to Adjusted Gross Income: The payer of alimony can no longer deduct it and the receiver need not report it as income. Moving expenses are now disallowed and the Domestic Production Activities Reduction has also been eliminated.

Alternative Minimum Tax: The exemption from the Alternative Minimum Tax has been raised from $86,200 to $109,400 and the phase-out threshold has been increased to $1,000,000.

One last change worthy of note. The Estate Tax exemption has been expanded from $5.6 million to $11.2 million, meaning a married couple can now pass on $22.4 million to their heirs tax free (Vermont’s estate tax kicks in at $2.75 million).

The new tax law will reduce tax revenues substantially.  The Congressional Budget Office estimates that changes to individual income taxes outlined above will reduce federal government tax revenues by $862 billion over the next 10 years.

 

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