American tax law is a constantly changing landscape. The latest major piece of tax legislation is the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, by President Donald Trump.
The 2017 law kept the 10% personal income tax rate and lowered the others to 12%, 22%, 24%, 32%, 35%, and 37%. It almost doubled the standard deduction, eliminated personal exemptions, and kept the long-term capital gains tax rates of 15% and 20%. In addition, the law limited the combined itemized deduction for state and local property taxes and local income taxes (or sales taxes in lieu of income) to $10,000 ($5,000 if married filing separately). Qualifying mortgage interest can be deducted on up to $750,000 of mortgage debt ($375,000 if married filing separately); for debt incurred on or before December 15, 2017, the prior $1 million limit will apply. The law also nearly doubled the estate tax exemption but kept the federal estate tax rate at 40%. These tax law changes affecting individuals are scheduled to expire after 2025.
The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, by President Barack Obama. It extended many of the provisions in the Taxpayer Relief Act of 2010 and the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001.
The 2012 tax law extended indefinitely the federal income tax rates that had been in effect since 2003 (10% to 35%) and added a 39.6% rate that was in effect prior to enactment of the 2001 tax law. The law also extended the 0% and 15% tax rates on long-term capital gains and qualified dividends and added a 20% rate. The law also extended the federal estate tax provisions of the Taxpayer Relief Act of 2010, with the exception that the top federal estate tax rate increased from 35% to 40%.
EGTRRA was signed into law by President George W. Bush on June 7, 2001. This bill provided the largest tax cut in two decades. Previous administrations have enacted other major tax packages. In the 1980s, the Reagan administration passed the Tax Reform Act of 1986. It not only reduced maximum tax rates and the number of federal income tax brackets but also eliminated many loopholes that existed in the tax code.
The Clinton administration also passed major tax legislation. The Revenue Reconciliation Act of 1993 eliminated some of the changes in the 1986 tax act and added two new federal income tax brackets to the existing three, with the top rate hitting 39.6%. The Taxpayer Relief Act of 1997 incorporated many reforms, including the reduction of long-term capital gains taxes and creation of the child and education tax credits, the Roth IRA, and the Education IRA, among other provisions.
Whenever major changes affect the tax law, there are potential ways that taxpayers can benefit their personal financial situations.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Gerald R. Dewes does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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