A New Year, A New Tax Plan: What to Expect


Congress just passed the biggest tax overhaul in 30 years called the Tax Cuts and Jobs Act. President Donald Trump signed that bill into law on Dec. 22, keeping his promise to give the American people major tax reform by Christmas. How these new changes are going to impact consumers, businesses, and the economy as a whole remains a point of contention in part because there are so many changes to the tax code. Here is a brief timeline of the major changes that are on the way courtesy of the new plan.

The Scramble to Save on 2018 Taxes

When it became clear that this bill was more or less going to become a reality in 2017, many experts began urging consumers to take some quick measures to reduce their 2018 tax burden. Since fewer people will itemize deductions in 2018, it makes more sense to give more to charity now so that you can itemize that donation on your upcoming tax return. Other recommendations include:

  • Pay off or pay down home equity loans in 2017.
  • Pre-pay your 2018 property tax bill if you have the option. In New York, this just became possible.
  • Make an extra mortgage payment in December to take advantage of the interest rate deduction.
  • Find out if you can pre-pay state income taxes.
  • Freelancers who make quarterly income tax payments may want to make an early payment.
  • Since marginal income tax rates have gone down, it may be better to defer income until the new year.

What to Expect in 2018

As of January 1, 2018, the new tax rules go into effect. For both consumers and businesses, this means a drastic change to income tax rates, allowable deductions, and tax credits. The Internal Revenue Service (IRS) says it is working on releasing new withholding tables in January and that taxpayers should see changes to their paychecks by February. For individuals, there are still seven tax brackets, but they have all been slightly lowered, some by as much as 4%. Tax rates for corporations are slashed from 35% to 21% and "pass-through" business owners, which are primarily small businesses, now have a 20% business income tax.

The new tax law claims to simplify the tax code by eliminating the personal exemption and drastically reducing the number of filers who will elect to itemize deductions. It accomplishes this by boosting the standard deduction for individual taxpayers to $12,000 and $24,000 for married filers, which is nearly double the old levels. The individual deduction for state and local taxes (SALT) is now limited to just $10,000 annually.

Many education deductions and credits were left in place, and there was an expansion of Section 529 plans to allow up to $10,000 each year to be used for private school tuition expenses. The mortgage interest deduction also remains, but it is now capped to mortgages valued at $750,000, down from $1 million. Interest on home equity loans is no longer deductible.

When you file your 2017 taxes in April, there are several changes in the new law applying retroactively which could impact individuals and businesses. First, taxpayers with high out-of-pocket medical expenses will be able to deduct more on their 2017 and 2018 tax returns due to an expanded deduction. Second, businesses that made equipment purchases after Sept. 27, 2017, will be allowed to take advantage of full, immediate expensing as opposed to gradual deductions.


What to Expect in 2019 and Beyond

As of 2019, several additional changes will be phased in thanks to the new tax plan. First, alimony will no longer be deductible on taxes. Also, the individual mandate on the Affordable Care Act ends on Jan. 1, 2019. According to estimates from the Congressional Budget Office, this will result in 13 million more Americans being uninsured and an increase in health insurance rates by as much as 10%. Beyond 2019, those individual income tax cuts will expire come 2026 unless the cuts are renewed by Congress. Some deductions and tax credits expire, while others are permanent. The corporate income tax rate cuts will not expire.

The Potential Impact of the New Tax Plan

How the new law changes will affect consumers and businesses is still speculation at this early stage. While it's possible that some homeowners will hold off on new home purchases because tax loopholes are disappearing, the fact that additional interest rate hikes are on the horizon might push up purchase decisions. In the most affluent areas, there's a real danger that property values could fall by as much as 10% in some places. Corporations who now have lower tax rates are expected to raise wages, boost productivity, and increase investor returns.

What's clear is that we're going to see some drastic changes in the coming year, which will impact both borrowers and lenders. As we move forward, some asset classes in a loan portfolio may become more profitable than others as originations increase in some areas and delinquencies in others. The best way for banks and non-banks to minimize risk and maximize returns is to partner with an asset management company that has experience with buying loans and selling loans to create the most favorable outcome for lenders.