The tax reform that cleared Congress and is awaiting President Trump’s signature is the biggest overhaul in the tax laws since the Tax Reform Act of 1986. This is a massive and complex series of new laws – not just in the magnitude of the cuts, but because it fundamentally alters many principles we’ve been operating under for decades. The reduction in the corporate tax rate from 35% to 21% will boost the U.S. economy after a decade of slow growth and far too little business investment. The changes are more muted on the personal side, but the majority of Newsletter readers will see some savings. If you are a high earner in a state with a high income tax (about 6.5% or higher), you may end up paying slightly more.
The new law changes have so many intriguing and frustrating facets that several Newsletters (at least two and probably three) will be needed to cover them all. This issue is devoted to the tax law changes affecting us personally. The January 15th Newsletter will be devoted to the changes affecting our practices and businesses.
Fairy Tale Tax Cuts: Like Cinderella at the ball, the tax party’s over at the stroke of midnight on December 31, 2025 for practically all of the changes that apply to individuals. The changes that apply to businesses will be permanent. As bizarre as it seems (and it really is bizarre), arcane Senate procedures allow the Senate to pass a tax reform bill with a simple majority, rather than the standard 60 votes, but only if the total tax cuts don’t exceed $1.5 trillion over the next ten years.
So, come the end of 2025, all of the individual changes including the lower tax brackets, the bigger standard deduction and the bigger estate tax exemptions will expire. This will put pressure on the future President and Congress to extend them. We went through this saga once before when the Bush-era tax law changes of 2001 expired at the end of 2010. The Obama administration and Congress bowed to political pressure and extended most of those expiring tax cuts.
Lower Tax Rates and Brackets: The new law keeps the seven bracket structure but reduces most of the rates and the income ranges for which those rates apply. Here are the current and the new rates for marrieds filing a joint tax return. At every rung on this ladder, except for the narrow sliver of income earned between $400,000 – $424,950, our tax rates will be lower.
For single taxpayers, the same seven tax rates will apply, except the income ranges will be cut in half. So for example, the 10% rate will apply to income earned between $0 – $9,525, the 12% rate will apply to income between $9,525 – $38,700, etc. The only exception will be that the highest rate kicks in for single taxpayers at the $500,000, not $300,000.
Income Level Current Rate New Rate
$0 – $19,050 10% 10%
$19,050 – $77,400 15% 12%
$77,400 – $156,150 25% 22%
$156,150 – $165,000 28% 22%
$165,000 – $237,950 28% 24%
$237,950 – $315,000 33% 24%
$315,000 – $400,000 33% 32%
$400,000 – $424,950 33% 35%
$424,950 – $480,050 35% 35%
$480,050 – $600,000 39.6% 35%
Over $600,000 39.6% 37%
Stated another way, the new law keeps the “marriage penalty” in place, but only at the highest income range. Our tax rate and deduction system is a double edged sword for marrying couples. Some find their total tax is less than what they paid as singles, but many find their tax bill goes up (thus the phrases “marriage penalty” and “marriage bonus”). Generally, married couples with incomes split more evenly than 70%/30% suffer a marriage penalty, and those with more income attributable to one spouse get a marriage bonus. The new law attacks, but doesn’t eliminate, the marriage penalty by fixing the income ranges for married taxpayers at two times the ranges for singles. The only exception now is that the 37% bracket starts at $500,000 for a single person and $600,000 (not $1,000,000) for a married couple. Until now, the marriage penalty kicked in at the much lower 25% bracket. The new change may be enough to get some long-time co-habitants to finally tie the knot.