Congressional consideration of the GOP tax bill has been characterized all along by reckless speed when it came to key decisions being made. And so it’s fitting that most of the provisions affecting individuals (rather than corporations) will take effect almost immediately, on January 1, 2018. Generally when Congress does that sort of thing they are trying to keep taxpayers from taking action to protect themselves from adverse consequences. And there will be some, particularly if you don’t derive your income from corporate dividends or stocks.
Here are provisions that will definitely affect millions of individual filers:
1. You may be saying good-bye to the option of itemizing deductions. If you are one of the estimated 30 percent of taxpayers who usually itemize deductions while also relying on personal exemptions to shield some of your income from taxation, you’ll need to rethink your strategy for dealing with Uncle Sam. The new bill significantly pares back deductions while abolishing personal exemptions. It also doubles the standard deduction for non-itemizers. So itemizing will be less attractive for many taxpayers. That’s good if you don’t want the hassle of keeping up with things you do that earn deductions. That’s bad in the sense of denying you that option.
2. If you live in a state with high income or property taxes, the deductions you lose might really pack a wallop. The final tax bill limits the deduction for state and local income, sales and property taxes — unlimited up until now — to $10,000. In 2015, the average SALT deduction for Californians — over a third of whom took it — was $18,400.
Taxpayers in some jurisdictions that allow advance payment of property taxes may uncharacteristically rush their checks in so that 2018 taxes can be deducted on 2017 tax returns. The GOP bill prohibits that sort of approach with income taxes, however.
3. If you live in a place with very high real-estate values, you may lose part of your mortgage-interest deduction. The final tax bill limits the famously popular deduction on mortgage interest to mortgages valued at $750,000 or less (the current cap is $1.1 million). But you don’t have to be buying or paying for expensive homes to feel the bite from this bill: It also eliminates the deduction for the land-rich, cash-poor American’s best friend, the home equity loan (currently deductible up to $100,000).
4. It may make sense to make expenditures that are deductible now rather than later since you may not be itemizing in 2018. There are some items that will still be fully deductible on January 1 that you might want to exploit by December 31 in case you don’t itemize next year. One of those is the charitable contribution deduction. So if you want the Feds to subsidize your generosity, act now.
5. Your tax rates will change — for now. Most non-wealthy individuals will benefit from a lower marginal tax rate next year, and early in 2018 withholding allowances should reflect that, putting a little extra into paychecks (if you earn a lot of money, the reduction in the top rate from 39.6 to 37 percent will correspondingly mean a much bigger windfall, though in most cases not as much as other benefits in the bill targeted to the wealthy, including the indirect effects of the big corporate tax cuts).
But before you let the idea of keeping more of your earned income affect your long-term planning, it should be kept in mind that virtually all of the individual tax cuts are scheduled to expire at the end of 2025. Yes, Republicans confidently assert that they’ll be extended because the trickle-down effects of the tax bill will produce an economic paradise that will wipe out the trillion dollars in debt this bill produces even according to its own fuzzy math. But that’s classic pie-in-the-sky-bye-and-bye.
In addition, the bill changes the way inflation affects tax brackets in a way that will increase effective income tax rates over time. So enjoy lower tax rates, if you can, while they last.
6. The federal government wants you to have children. The tax credit made available to parents for each child is being doubled, and the benefit will be available to a lot more people at the higher end of the income scale (the credit will begin phasing out for individuals earning over $200,000 and couples earning over $400,000). Thanks to a late pressure play by Senator Marco Rubio, the credit will be more valuable to people with no federal income tax liability but who owe payroll taxes; still, the overall benefit remains tilted toward the upper-middle class.
If you are the kind of person who wants to have lots of kids because of conservative religious views, the tax bill may have another tasty treat for you: an extension of a popular tax break for educational savings accounts from higher education to K–12 expenses. This effectively subsidizes religious schools and home-schoolers.
7. “Pass-through” business income will get a big new break.If you’re a lawyer or some other kind of professional operating through a partnership, a sole proprietorship or an S-corporation, you can get a new deduction sheltering 20 percent of your income from individual taxation, effectively reducing the tax rate. The break is structured to give significantly greater help to capital-intensive businesses on the theory that their income is less like earned individual income. But it may have a perverse effect:
“This seems ideally suited for commercial property businesses, where there aren’t a lot of workers, but there is a lot of valuable property around,” said Steven Rosenthal, senior fellow at the nonpartisan Tax Policy Center, a think tank.
Three guesses which very prominent Republican is in the commercial property business.
8. If you’re a tax adviser, you’re in luck. While the bill will hurt some low-cost tax preparers once the negative impact on itemizing deductions kicks in, there are other features that will be a boon to the industry. One is the likely flood of wealthy people trying to qualify for the pass-through break described above. And the other, for tax professionals who aren’t taking any time off between now and the New Year, is the rush to figure it all out before that January 1 effective rate.
Good luck with that.