BOULDER – Regardless of where you lie on the ideological spectrum, having a basic understanding of the tax laws in our country is crucial. For many of us, poring over the details of tax reform isn’t just frustrating… it’s also confusing. If legislative terminology looks like a foreign language to you, you’re not alone. To the extent that we can (remember, we’re not tax pros), we’re here to help you decode the mystery of the tax overhaul. Here, we’ve outlined a few of the biggest changes that may affect your 2018 taxes. Please keep in mind that none of these differences apply to your 2017 tax routine.
Individual tax rates
Tax reform has been touted as a massive tax cut – the bill is even titled the Tax Cuts and Jobs Act. However, you may be surprised to learn that the individual tax brackets haven’t changed drastically. Below, we’ll walk you through a bit of what’s in the bill.
The new tax code contains seven brackets. Tax responsibilities start at 12%.
The current individual rates are capped at 39.6% for incomes above $426,700 for single individuals and $480,050 for couples. Under the new law, the top tax rate will be 37% for incomes of $500,000 for single taxpayers, and $600,000 for married couples.
While the alternative minimum tax still exists, the exemption level has increased, so only households with high incomes should expect to pay the AMT.
Corporate tax rates
If you’re the owner of a corporation or pass-through entity, you’ll benefit from the changes in the tax system. Here are the important updates:
Under current rules, C corporations were taxed at 35%, and again at 23.8% after distributing income to shareholders. Beginning in 2018, members of C corporations will pay a rate of 21% before shareholders follow up with 23.8%.
In 2018, members of pass-through entities will retain their lower rates compared to C corporations. The top tax rate of 40.8% was slightly lowered to 37%, but owners of these business structures will have the ability to take a deduction of 20%. In practice, this cuts the rate of sole proprietorships, S corporations, and partnerships to a top rate of 29.6%.
Standard deduction and personal exemptions
Standard deductions are used to help individuals lower the amount of their taxable income. Since the tax overhaul has passed, there are a few changes to recognize:
The new legislation doubles the standard deduction. Formerly, the standard deduction amount was $6,350 for single taxpayers and $12,700 for married couples filing jointly. Under the incoming laws, the proposed standard deductions are $12,000 for single individuals and $24,000 for spouses.
Personal exemptions of $4,050 used to be allowed. However, the upcoming tax code no longer authorizes them.
Changes to real estate and investment taxes
Whether you’re a real estate investor or you’re thinking about purchasing your first home, the changes in policy will likely affect you. Here’s what to expect:
The new law reduces the amount of mortgage interest deductions for both primary and secondary residences. The new cap is set at $750,000 instead of its previous allowance of $1 million.
State and local tax deductions, also known as “SALT,” have been capped at $10,000 for both single and married filers. Previously, there was no cap implemented.
There’s quite a bit to unpack in the new tax code. The overview covered here isn’t exhaustive – in fact, it only scratches the surface. There’s plenty complicated tax jargon to sift through out there, but we hope this summary is helpful for those of you who like to keep things streamlined. In general, corporations and business owners will see a substantial decrease in their tax rates. While some individuals may be subject to lower taxes, it largely depends upon your unique situation, so be sure to check with your accountant about the changes.
By Jennifer Egbert, RE/MAX Alliance. Jennifer Egbert is a Realtor at RE/MAX Alliance Downtown in Boulder and specializes in Luxury neighborhoods, home builders and current market conditions. To learn more about the Boulder real estate market, visit jenniferegbert.com, e-mail firstname.lastname@example.org or call 303.619.3373.