2017 Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act has now been passed by Congress and is awaiting President Trump’s signature. The question now arises, what does this mean for the average resident living in Frisco, Texas? Tax bills, as are most bills, are horrible to read because they simply amend existing sections of code. The Tax Cuts and Jobs Act is no different. So, below are a few highlights into how the Act could affect you, if and when President Trump signs it into law.

Individuals

The biggest change to individuals will likely be the increase of the standard deduction to $24,000 from $12,700 for married couples. For individuals, the standard deduction was increased to $12,000 from $6,350. Over 80% of the people will no longer itemize their deductions because of the increase to the standard deductions. It will be interesting to see how this affects housing down the road. Most potential homebuyers will have less incentive to buy houses because the mortgage interest write-off and property taxes write-off will be less than the standard deduction.

Speaking of housing, a late amendment to the tax bill omitted a provision that would have changed the exemption from capital gains on home sales (up to $500,000 for married couples) for primary residences. Earlier provisions in the bill stated that a homeowner must live in their house five out of the last eight years (instead of the current two out of the last five years) to be able to receive the exemption. However, the bill that passed made no change. Therefore, homeowners still must only live in their homes for two out of the last five years to take advantage of the capital gains exemption. The late omission was very important to housing in my opinion.

In addition, many of the tax rates were also reduced by a couple of percentage points. The child tax credit was increased from $1,000 to $2,000 and the taxpayer receives $500 for each dependent, which is a tax credit that did not exist. However, the personal exemptions disappeared. The net effect of all this will vary depending upon each taxpayer’s family size and tax rate.

Finally, the mandate requiring individuals to have insurance was repealed will expire in 2019. From an “I shouldn’t have to buy it if I don’t want it” standpoint, an idea to which I subscribe, this is a good thing. However, it will be interesting to see how it affects rates in the ACA Marketplace. The ACA was already dying under its own weight so this will probably accelerate it by a couple of years. States are going to need to revamp their old high-risk pools to cover an approaching gap. Texas’ High Risk Insurance Pool shut down in 2013. State lawmakers should probably hold an emergency session to consider reopening it.

Small Business

Small businesses are perhaps the biggest winners from the tax Act because of the changes to taxation on passive income (income derived from LLC’s, partnerships, S-corporations, etc.) They will see a twenty percent deduction on their first $315,000 of income. In addition, the small business expense cap increased from $500,000 to $1 million.

Corporations

Corporations were also big winners because their tax rates decreased from 35% to 21%. This is very good for individuals because our retirement plans and investment accounts are huge owners of these corporations. In addition, the corporations have been incentivized through the act to reinvest the tax savings into capital projects that should result in job growth.

Estate Planning

The exemption from the estate tax increased from $5 million for individuals to $11.2 million. With proper estate planning, married couples could receive a tax exemption on the first $22.4 million of their estates.

Robert Newton is an attorney in Frisco, Texas, that practices in the areas of real estate, business, and estate planning.