Income brackets have changed. More importantly, the IRS will now measure inflation differently when making adjustments to these brackets in the coming years. This essentially equals a tax increase over time, as peoples’ incomes will increase more quickly than the consumer price index (CPI) measure now included.

The new CPI measure is chained CPI. The difference between the new measure and the way inflation was previously measured is the new measure accounts for consumer substitution patterns. Consider the example used by the Bureau of Labor Statistics (BLS), which publishes the chained CPI figure. When the price of beef rises, the traditional form of CPI would use this higher price of beef to increase the CPI measure directly. But the chained CPI figure accounts for consumers who might actually substitute another meat which hasn’t experienced a price increase, say, pork.

The overall effect is for chained CPI to rise more slowly than the traditional CPI measure. This impacts tax brackets because the brackets will also rise more slowly, meaning when household income rises in the future, people will be shifted into higher tax brackets more quickly than they would have under the old measure when inflation elevated these brackets more in time with incomes.

For a historical example, see how chained CPI has moved more slowly than the traditional CPI measure in the past:

The standard deduction has almost doubled under the new tax plan. This has two results:

• Households that typically have taken the standard deduction will see a tax cut since the deduction is now much higher; and
• It will now make more financial sense for most people to take the standard deduction rather than itemize, resulting in higher taxes for about half the people who used to itemize under the old rules.

For real estate, this change is particularly important since the mortgage interest deduction (MID) can only be taken if a homeowner itemizes their taxes. Therefore, fewer homeowners will take the MID in future years.

Taxpayers who don’t carry health insurance will no longer pay a penalty for being uninsured — this was called the individual mandate.

The impact of repealing the individual mandate will be twofold:

• an immediate tax break for those taxpayers who did not have health insurance and were forced to pay the tax penalty; and
• higher insurance rates for everyone who has health insurance.

The reason? The individual mandate was an effort to induce more healthy people to sign up for health insurance. This helped insurers keep their costs down. But now that healthy people don’t face a penalty for enrolling in basic health insurance plans, insurers fear they will be left with only sick people on insurance. 

When more people are using their plans because of illness or other ailments, insurance will become more costly. However, the 3.8% tax on net investment income and profits added by the Affordable Care Act remains in place under the new rules.

The Affordable Care Act added a 3.8% tax on net investment income and profits (classified as unearned income) when modified adjustable gross income (AGI) exceeds a threshold of $250,000 for joint filers (or $200,000 for single filers). For real estate investors, this includes income and profit from:

• the operations and sale of rental property; and
• interest income on savings and trust deed notes, earnings on land held for profit and rents received on triple net leased property.