The Tax Cuts and Jobs Act (TCJA) lowered individual income tax rates, increased the standard deduction and reduced the corporate tax rates. The highest individual tax rate dropped from 39.6% to 37%. The new tax plan also reduced the corporate tax rate from 35% to 21%. The corporate cuts are irreversible, while the individual changes expire in late 2025.
The Standard Deduction vs. Itemized Deductions
In 2019, the standard deduction for a single filer went up from $6,350 in 2017 to $12,200. The married joint filers benefit increases from $12,700 in 2017 to $24,400. For most households, it now makes sense to take advantage of automatic standard deductions instead of itemized deductions.
Individual Federal Income Tax Brackets
The TCJA reduced tax rates but maintained seven tax brackets. As of 2019, the highest tax bracket starts at just over $500,000 in taxable income for single individuals and $600,000 for married couples. Following exemptions and deductions, these taxpayers are subject to an income rate of 37%.
|2019 Tax Brackets (Due April 2020)|
|Tax rate||Single filers||Married filing jointly*||Married filing separately||Head of household|
|10%||$0 – $9,700||$0 – $19,400||$0 – $9,700||$0 – $13,850|
|12%||$9,701 – $39,475||$19,401 – $78,950||$9,701 – $39,475||$13,851 – $52,850|
|22%||$39,476 – $84,200||$78,951 – $168,400||$39,476 – $84,200||$52,851 – $84,200|
|24%||$84,201 – $160,725||$168,401 – $321,450||$84,201 – $160,725||$84,201 – $160,700|
|32%||$160,726 – $204,100||$321,451 – $408,200||$160,726 – $204,100||$160,701 – $204,100|
|35%||$204,101 – $510,300||$408,201 – $612,350||$204,101 – $306,750||$204,101 – $510,300|
|37%||$510,301 or more||$612,351 or more||$306,751 or more||$510,301 or more|
Individual California Income Tax Rates
California has a progressive income tax, which means rates are lower for lower earners and higher for higher earners. This is similar to the federal income tax system. In all, there are nine official income tax brackets in California, with rates ranging from as low as 1% up to 12.3%.
|Tax rate||Single filers||Married filing jointly*||Head of household|
|1%||More than $0–$8,544||More than $0–$17,088||More than $0–$17,099|
Corporate Federal Tax Rates
The Act reduces the overall corporate tax rate from 35% to flat 21%, the lowest since 1939.
This provides a regular 20% deduction for pass-through companies on taxable profits. This deduction runs out after 2025. Pass-throughs include single ownerships, trusts, limited liability companies, and S corporations.
The Act limits the ability of companies to deduct interest costs to a profit of 30%. It allows companies to deduct the cost of depreciable assets in one year rather than amortize them over several years. The legislation also stiffens the criteria for carried interest profits. Carried interest is paid at 23.8% rather than the top income rate of 39.6%. To order to qualify for the lower rate, companies must retain assets for one year.
Corporate California Tax Rate
California imposes three types of income taxes on businesses: a corporate tax, a franchise tax and an alternative minimum tax. Nearly all businesses in the state are subject to at least one of these taxes, and sometimes more than one.
The corporate tax applies to corporations and LLCs that elect to be treated as corporations. This tax rate is a flat 8.84% or a flat AMT of 6.65%.
S corporations, which provide similar legal and financial protections as C corporations but pass through income to business owners, pay a franchise tax of 1.5% of net income. The minimum franchise tax is $800, even for S corporations that claim zero or negative net income.
Limited liability companies also pay the franchise tax, but it is calculated differently than for S corporations. Instead of a flat percentage rate based on net income, LLCs are taxed at flat dollar amounts based on gross income tiers. Gross incomes between $250,000 and $499,999 pay a tax of $900. Gross incomes between $500,000 and $999,999 pay a tax of $2,500. Gross incomes between $1 million and $4,999,999 million pay a tax of $6,000. Gross incomes of $5 million or greater pay a tax of $11,790. For businesses with less than $250,000 in gross income, the $800 minimum franchise tax applies. The net income from an LLC passes through to the business owners, who must pay personal income tax at marginal rates from 1 to 12.3%.
The TCJA increased the exemption from estate taxes from $5.49 million in 2017 to $11.18 million
They may benefit from the 20% deduction
Young taxpayers may benefit from the reduction of the tax penalty for Obamacare.
Those Lost Personal Exemptions
Before the TCJA, taxpayers were able to deduct $4,050 each for themselves, their partners and each of their dependents from their taxable incomes. After the TCJA’s passage, there are no more personal deductions, so the $24,400 standard deduction would be all the couple could claim. That’s $8,550 more money they’ll pay taxes on if they don’t demand any other tax deductions or benefits.
Fewer Itemized Deductions
The TCJA does away with most miscellaneous itemized deductions.
The TCJA limits the mortgage interest deduction to a loan’s first $750,000. Interest on home equity loans or credit lines can no longer be deducted unless the proceeds were used to purchase, build or develop the home significantly.
The deduction for state and local tax (SALT) is still in effect, but it has been capped at $10,000. This hurts California home owners.
The threshold for deductions for most charitable contributions has increased to up to 60% instead of 50% of one’s AGI.
Now, catastrophe loss exemptions are limited to those incurred in regions with federally-declared disasters.
The threshold for the deduction of medical expenses fell from 10% to 7.5% of AGI, so taxpayers can demand bigger deductions.
The important change is the TCJA’s abolition of the Pease cap on itemized deductions. This tax provision that reduces itemized deductions by 3% over certain limits for each dollar of taxable income is gone.
Above-the-Line Adjustments to Income
The above-the-line deduction for moving expenses was eliminated, except for military active-duty members. It can no longer be withheld by those who pay alimony as an addition to wages.
The TCJA holds the retirement savings deduction. It also allows those age 70.5 or older to move directly from their individual retirement accounts to eligible charities for up to $100,000 a year.
Also the TCJA retains interest on the student loan deduction.
Changes to Tax Credits
The TCJA raised the Child Tax Credit to $2,000 from $1,000. Even parents who do not earn enough to pay taxes can receive a credit reimbursement of up to $1,400. It also implemented a $500 Other Dependents Bonus, which benefits families whose dependent children are no longer meeting the strict criteria of child dependents.
Such tax credits are fully available to individuals with increased adjusted gross income of up to $200,000 for single filers, and $400,000 for married taxpayers who make joint returns.
The TCJA repeals the Obamacare tax penalty levied to those without health insurance. The number of private insurance investors remained steady, in comparison to projections.
The Alternative Minimum Tax
The proposal preserves the alternative minimum tax. This raises the deduction for singles from $54,300 to $70,300, and for joint from $84,500 to $109,400.
The Act maintains electric vehicle tax credits and wind farms.
For client entertainment and meals, deductions were cut from 50% to zero.
Other Changes to Corporate Taxes
The Act bans the alternative minimum tax (AMT), which had a tax rate of 20% that takes effect if tax credits pushed the effective tax rate of a company below 20%. Corporate AMT reduction contributes $40 billion to the deficit.
Under the global system, multinational companies are taxed on overseas earned income. They don’t pay the tax until they have brought home the money, so they stay there. The tax reform will not tax foreign profit to attract companies to invest in the US.
The Act allows for oil drilling in the National Arctic Wildlife Refuge, which is expected to generate sales of $1.1 billion over 10 years.
Los Angeles Tax Consultants
If you need professional help in your tax returns, Robert Hall & Associates’ small business tax consultants can help guide you in the right direction. Contact us today at (818) 242-4888 or fill out our contact form to schedule a free consultation.