The Republican-led tax reform passed the House (227-203) and Senate (51-48) on December 20. It’s now ready to be signed by President Trump. The new bill, the most significant tax reform since two tax bills were signed by Ronald Reagan in the 1980s (the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986) is worth an estimated $1.5 trillion in tax cuts.
Passage of the bill marks the Trump administration’s first major legislative victory. It’s music to the ears of much of the business community and is being lauded as a much-needed break from the high taxes of the past 30 years.
But how does the new bill affect you?
POTUS Trader breaks down the GOP tax bill and what it means for individual investors, regardless of income.
Individual Tax Rates
According to the current tax system, income tax rates begin at 10 percent, capping at 39.6 percent for those earning above $418,401 (single) and $470,701 (married/joint filers).
The new GOP tax bill proposes a 10 percent starting rate that tops out at 37 percent for those earning over $500,000 (single) and $600,000 (married/joint filers).
- 10 percent: $0 – $19,050
- 12 percent: $19,050 – $77,400
- 22 percent: $77,400 – $165,000
- 24 percent: $165,000 – $315,000
- 32 percent: $315,000 – $400,000
- 35 percent: $400,000 – $600,000
- 37 percent: $600,000 +
- 10 percent: $0 – $9,525
- 12 percent: $9,525 – $38,700
- 22 percent: $38,700 – $70,000
- 24 percent: $70,000 – $160,000
- 32 percent: $160,000 – $200,000
- 35 percent: $200,000 – $500,000
- 37 percent: $500,000 +
Corporate Tax Rate
Currently, corporations are taxed at the burdensome rate of 35%. The GOP tax bill proposes a reduced corporate tax rate of 21% starting on January 1, 2018. This is viewed as the biggest victory of the bill, with even many of the GOP’s opponents agreeing that a lower corporate tax rate is necessary for American businesses and individual workers.
Corporate Alternative Minimum Tax (CAMT)
Current U.S. law applies a 20 percent rate as part of a parallel tax system that limits tax write-offs in an effort to prevent large-scale tax avoidance. Companies must calculate their ordinary tax as well as their CAMT tax, and pay whichever is higher (Bloomberg).
The new tax bill abolishes the CAMT altogether, which will reduce the tax bills of many companies.
Current law dictates that so-called “pass-through businesses”, which include partnerships, limited liability companies, “S” corporations and sole proprietorships, pass their income on to their owners, who pay tax at their individual income tax rates.
The new tax bill will change that, offering business owners the opportunity to apply a 20% deduction to their business income. This deduction, however, will be subject to limits that begin at $315,000 for married couples (or half that amount for single taxpayers)
Current law allows the government to levy a 40% tax on estates worth more than $5.49 million for individuals and $10.9 million for couples. The new tax bill will double those thresholds, so the levy will apply to fewer estates.
This is a temporary measure, with the higher thresholds expiring in 2026.Still, it will benefit some individuals seeking to pass income on to their loved ones.
Obamacare Individual Mandate
Under the rules laid out under Obamacare, those who fail to purchase health insurance must pay financial penalties beginning at $695 (for families the penalty is higher) or 2.5 percent of their total household income (whichever is higher), but capped at the national average cost of the most basic, low-premium, high-deductible plan.
The new tax bill repeals this policy altogether. The individual mandate is the lynchpin of Obamacare’s requirement that insurers cover pre-existing conditions.
While the outcome isn’t certain, repealing the individual mandate will likely result in the gradual implosion of Obamacare, setting the stage for the GOP-led Congress to repeal and replace with a more market-oriented healthcare system that better meets the needs of Americans.