New Tax Laws are Here: Let Us Try to Understand Them

By Mo Vidwans

After all the struggles and the rhetoric that was put out by the Congress and the President, the new tax laws were finally passed, signed and sealed. It is something we need to understand and follow. Like any thing else in life, there are good things and bad things embedded in these regulations.

One thing is for sure: whatever is there in the law will affect every one of us working folks. It does not matter what immigration status you have; whether you are a student, H1B visa holder, temporary or permanent resident, a naturalized citizen or any other category. This law will affect all those who have income. They should be interested not only in the impact of this law but also in the form and shape it has taken and should carefully study and understand it. Unlike other legal situations, everyone who has income has his/her skin in this game.

My strong suggestion would be that even if you are not a citizen and cannot vote, you are still very much affected by the law and you should write to your congressman and the two senators, letting them know what your feeling are about how it is impacting you. All middle class families, especially, have to be very vigilant about this.

I am giving answers below for some of the most frequently asked questions about what passed.

Are these laws temporary or permanent?

Believe it or not, most individual tax provisions are temporary. They expire after 2025. Unless extended or changed by the new Congress then and signed by the new President, the laws will automatically revert to the rules now in effect for 2017. The corporate tax changes, however, are permanent and will not automatically revert back.

What are the salient changes to the individual taxes?

Most striking one is that the Standard Deduction nearly doubled with couples getting $24,000 now and the appropriate sum for singles and head of the households as well. Folks 65 and up and blind people will also get $1,250 more per person. What many folks don't realize is that the personal exemption for individual filers and their dependents is also totally repealed. This will nullify the beneficial effect of doubling up the standard deduction for most. However, because the standard deduction is doubled it will discourage many folks from itemizing. Today about 50 million taxpayers itemize their returns. It is expected that the number of taxpayers itemizing will drop by half.

Most of you probably have heard about the mortgage interests and state taxes deduction limitation. Home mortgages are curtailed; interest can be deducted up to $750,000 of new acquisition debt on primary or secondary residence. This limit applies only to mortgages incurred after December 14 2017. No write-off is allowed after 2017 for interest on existing or new home equity loans.

State and local taxes are also squeezed. Any combination of residential property taxes and income or sales taxes can be deducted up to a $10,000 ceiling. Property taxes remain fully deductible in a business or for-profit activity; which means taxes paid on rental realty can be taken in full on schedule E.

What other write-offs are changed or eliminated?

Several other write-offs from Adjustment to income and Itemized list are eliminated. Deductions for job-related move expenses, all misc expenses subject to 2 percent of AGI limit including employee unreimbursed business expenses, brokerage and IRA fees and tax preparation costs, theft losses, alimony for post-2018 divorce decrees and most importantly personal casualty losses are all gone for 2018 and beyond. Surprisingly this includes presidentially declared disaster areas, too.

Then what is preserved or enhanced?

Well, the charitable contribution deductions are preserved, in fact, enhanced a little bit. The AGI limitation on cash donations to qualified charities is upped from 50 percent to 60 percent.

The medical expense deduction is actually enhanced. Not only did lawmakers keep this popular write-off, they also have temporarily lowered the AGI threshold for deducting 2017 and 2018 medical expenses on schedule A from 10 percent to 7.5 percent for all.

What about the actual income tax rate?

The law keeps the seven tax brackets but with different rates and break points. Not only is the top individual tax rate is lowered to 37 percent but also that rate kicks in at higher income level. Readers should also note that whatever new bracket you fall into, more of your taxable income will be hit with lower tax rates than before. One has to wonder how much of a tax break or relief are we really getting. Inflation indexing of income tax brackets is also altered using a chained consumer price index resulting in lower inflation adjustments from year to next year. This is a hidden tax hike that will adversely affect nearly all taxpayers over time.

Tax rates on long-term capital gains and qualified dividends do not change, but instead of depending on tax-brackets, congress decided to set the rates on income thresholds independently. The 0 percent rate will apply on joint returns up to $77,200 and 20 percent will start at $479,000 for joint filers. The 15 percent rate will apply for filers between those two.

Other notables: The child tax credit is doubled. The kiddie tax is significantly revamped. 529 college savings plans are enhanced. Many individual owners of pass-throughs will get a new 20 percent deduction. The rules cover sole proprietors and owners of S corporations, partnerships and LLCs.

It is clear to me, as it should be to you as well, that the new proposal, contrary to what the Republicans are touting, is going to affect the middle class adversely. And the prime motive behind this is to reduce taxes on Corporations and for the top 1 percent of the population. And it is not just a deficit neutral shifting process either. In the process of shifting the tax burden we are also adding about $1.5 Trillion additional debt to the society, which will be shouldered by us, the common people. National debt is perhaps the biggest threat to our national security; something worth thinking about.