The Tax Cuts and Jobs Act is the largest piece of tax reform legislation in 30 years and was signed into law on Dec. 22, 2017. For most taxpayers, these tax changes impact tax year 2018 and not tax year 2017. Overall, the changes associated with this act will lower taxes for individuals and small businesses.
Although some millennials (those born roughly between 1978 and 1998) work for employers in the traditional sense, many of them tend to embrace the gig economy. This means they may work for themselves on a full-time or part-time (such as an Uber driver) basis. In the eyes of the IRS, self-employed people are treated as small business owners.
The following infographic provides a glimpse at the impact for a typical single filer before and after the tax changes are applied. This is a mock scenario for you to review and share with your millennial clients, whose results may differ.
Highlights of Changes Pertinent to Millennials
Lower Tax Rates
There are seven tax rates under the new law: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Here is the tax rate schedule for single filers:
Standard Deduction Increased
The standard deduction for taxpayers not itemizing deductions on Schedule A increased to $24,000 married filing joint, $18,000 head of household and $12,000 for other filing statuses. For taxpayers who are itemizing deductions, there is no longer a phase-out for high-income earners.
Personal Exemption Repealed
Under prior law, the personal exemption was $4,050. This exemption was has been repealed under the Tax Cuts and Jobs Act.
New Deduction for Self-Employed Workers
Under the new law, there is a 20 percent deduction on business income for small business owners who report their operations on Form 1040, such as sole proprietors who use Schedule C (as well as income from partnerships, S corporations and limited liability companies). This is a big windfall for small business owners as $20,000 of $100,000 of business income would go untaxed!
There are some complicated rules surrounding this deduction, including a phase-out of the deduction for high-income earners (over $157,500 for single filers and $315,000 for joint filers).
The generous 50 percent bonus depreciation deduction has been increased to 100 percent under the new law. This allows business owners to write off or expense the full amount of capital asset purchases, such as furniture and equipment, in the first year.
The depreciation deduction is limited for automobile purchases. If you choose to take bonus depreciation, the most you can deduct in year one of buying a car is $18,000 ($10,000 if bonus depreciation is not chosen). Sports utility vehicles carry a $25,000 limitation.
In general, you’re allowed to offset gambling or wagering losses to the extent you have gambling winnings. Under prior law, other expenses connected with gambling activities, such as transportation and admission fees, were allowed to be deducted regardless of winnings. This has changed and now related expenses are also allowed only to the extent of winnings (along with gambling losses).
Alternative Minimum Tax
The alternative minimum tax (AMT) ensures people are taxed at a certain minimum rate on their income to make sure they pay their fair share. Under new law, the exemption levels when the AMT kicks in have been increased to $109,400 for joint filers and $70,300 for unmarried taxpayers.
Affordable Care Act Mandate
Individuals who are not covered by insurance or an exemption will no longer have to pay a penalty beginning in 2019.
Access the latest information about tax reform, including a new set of live webinars covering a variety of related topics, at the Intuit® ProConnect™ Tax Reform Resource Center.