If the Act passes, it will signal the most sweeping tax reform our county has seen since 1986. Lawmakers are touting it as a great simplification of the tax code which will save the middle class money.
Although the idea of filing an income tax return on a postcard sounds great, it is unlikely that most people’s tax situations will be simple enough to use one. We already have Form 1040-EZ, which is a one-page return with only 14 lines on it. This can only be used by taxpayers who do not have dependents, do not itemize deductions, and have only specific categories of income. Even under the new Act, most taxpayers will still have various tax forms and pages to file.
The calculation of tax liability would become a bit easier, however. The alternative minimum tax (AMT) would be repealed. The AMT is a complicated calculation that couples with income above $84,500 must make in addition to calculating the ordinary income tax liability. Also, there would only be four tax brackets instead of the seven we have under current law.
One of the most contentious issues in the Act is the elimination of many itemized deductions which are currently available. The deduction for both medical expenses and state and local income taxes would be eliminated, along with several others. The deduction for mortgage interest would have lower limits for new home purchases, and the deduction for real estate taxes would be limited to $10,000 and only for the taxpayer’s primary residence.
This could have significant implications for a New Jersey couple who own a shore house in addition to their main home. Not only would their New Jersey income tax no longer be deductible, but they would lose the federal deduction for the shore home’s real estate taxes.
The standard deduction would almost double, to $12,200 for single taxpayers and $24,400 for couples. This certainly helps those who already didn’t itemize their deductions, since they get to take additional money “off the top” before computing taxable income. For those losing significant deductions, however, the increase isn’t enough to make up the difference. Personal exemptions are also eliminated, so this could hurt families with children. The child tax credit would increase from $1,000 to $1,600, however.
Although the tax rate on pass-through business income would be 25% instead a taxpayer’s ordinary tax rate, there are many proposed restrictions and limitations. Most notably, service business in industries like medical, law, engineering, accounting, athletics, performing arts, and financial services would not qualify for the reduced tax rate.
The corporate tax rate would be a flat 20% instead of the graduated brackets which currently range from 15% to 35%. This provision will save large corporations quite a bit of tax, but it is unlikely to affect most taxpayers who operate their small businesses as sole proprietorships, partnerships, or S-corporations.
Well, that depends! Each taxpayer is unique in regard to the character of income and types of deductions. If you really want to know what would happen to your tax return if the Act gets passed (and that is no certainty, of course), ask your CPA to do a calculation. I looked at two different couples who both had over $500,000 in income in 2016. One couple would pay just about the same amount under the new plan, and the other would save about $5,000. Another single taxpayer with $30,000 in income would save about $277.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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