So we’ve seen our government in action working through the sausage-making process of passing a major new tax act over the past couple of weeks.
The House voted in favor, the Senate voted in favor (of a slightly different bill), and then the House voted in favor of the slightly different Senate bill.
Voila! We have a new tax act, ready to be signed into law by the President.
People are interested in how the new tax law is going to affect them. I have the question asked of me, how is this going to change things, what should I do, etc.
We all know by now that there are still going to be 7 different income tax brackets, just a like now, but the ranges of incomes in the various brackets will be changed, and the rates will be lower.
The standard deduction has been increased, but the personal exemptions are gone. Also, the deduction for state and local taxes and the home mortgage interest deduction for new mortgages have been limited–for many, even most people, these limitations won’t be noticed. But for those in high tax states or who have new extremely large home mortgages, the tax changes in the new act will be detrimental.
Rather than going into specifics or getting into the weeds on the new tax act (you can read all about the numbers and the limits in any number of places), I want to just point out a few items that are interesting to me as a lawyer who has worked in the tax area for a long time.
First, this is the first “major” tax change in over 30 years. The last time we had a change this big, Ronald Reagan was President. In fact, after the last big change to the Internal Revenue Code in 1986, tax lawyers began referring to the tax code as the Internal Revenue Code of 1986. Will we start now to refer to the tax code as the Internal Revenue Code of 2017? I’m not sure, but I think we probably will.
Second, the biggest change is not really with individual income tax rules, but rather with the dropping of the tax rate on corporations from 35% to 21%. This could be big. We will see how this large drop in the tax rate for corporations does for business and the economy, but I think we could begin to see a major positive shift in business development and economic growth.
Third, the doubling of the size of estates that can be passed to the next generation at death from $5.6 million to $11.2 million (and double that with the estate of a married couple) means that very, very few people will be subject to the estate tax. Estate planning will move even more to providing for non-tax objectives of families, such as protecting assets from creditors and spendthrift heirs. Life insurance purchases will increase, because you will be able to buy a lot of life insurance without causing your estate to be taxable. But look out for the sunsetting of this estate tax exclusion increase–it is set to return to current levels after 2025.
Finally, the repeal of the Obamacare individual mandate is huge. With no legal requirement for individuals to purchase health insurance, look for more and more healthy younger people deciding to forego health insurance coverage. Rates may rise in the marketplace, and there will surely be renewed calls to do something to improve the health insurance system.
The start of a new tax law regime is always exciting (for those interested in taxes)–we will want to closely follow developments in the coming months to see if the Republicans in Congress and the President were right in pushing forward this legislation or whether the Democrats in Congress were right to oppose it.
My guess is that it will be a mixed bag–visible improvement in the broader economy, a stronger life insurance industry, an infusion of cash from overseas with a possible worsening in the health insurance marketplace, an exodus from high tax states, and a softening of the real estate market.
Before you know it, the 2018 electoral year will be upon us. The coming 6 months will tell us a lot about how the the November 2018 elections will go.
Stay tuned.