On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. It has been touted as one of the most significant overhauls to the Internal Revenue Code since the Tax Reform Act of 1986. The new law reduces tax rates for corporations and individuals, while repealing many deductions taxpayers were accustomed to, in an attempt to “simplify” the filing of their tax returns. This post will focus on the changes that will impact individuals. We’ll follow it up with another that focuses on the changes for business entities at a later date.
One of the most important things to note about the changes outlined below is that many go into effect for tax years ending after January 1, 2018. As such, most of this will not apply when you file your 2017 tax return during the 2018 filing season (i.e. the ones due 4/17/18). With that said, under each section you will find a “planning” comment to aid you in preparing for how it may impact the tax return you file in early 2019.
Tax Brackets and Tax Rates
The new law retains the seven tax brackets that previously existed, however, the rates are now 10%, 12%, 22%, 24%, 32%, 35% and 37%. Shown below are how the brackets and rates are applied to each filing status:
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The new law doubled the amount of the previous standard deduction to the following amounts:
Planning Comment: If you previously itemized, you may no longer need to due to these increased amounts. Remember, the IRS lets you take the standard or itemized deduction, whichever is greater. With that being said,if your itemized deductions (discussed below) do not exceed these amounts, your tax filing just “theoretically” became more simple.
The personal exemption has been repealed and will not be available after tax year 2017.
Planning Comment: If you have a large family and moderate income, this change might hurt you. Because you will no longer receive an exemption for every member of your household listed on your return (which lowers your taxes), you could see your tax bill increase.
The Alternative Minimum Tax (AMT)
The phaseout thresholds have been increased to $1,000,000 for those filing as married filing joint, and $500,000 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation.
With the exception of the items outlined below, all other itemized deductions are repealed. The overall limitation on itemized deductions for upper income individuals is also repealed.
- Medical Expenses: For 2017 through 2018, expenses exceeding 7.5% of income are deductible. This percentage increases to 10% in 2019.
- State and Local Taxes (SALT): Taxpayers can claim up to a $10,000 deduction for a combination of state and local income tax, sales tax, or real estate taxes. Foreign real property taxes are no longer deductible.
- Mortgage Interest: The deduction for mortgage interest is capped at $750,000 of debt, but is still allowed on a first or second home. The interest on home equity loans will no longer be deductible. Interest on up to $1 million of acquisition debt for loans entered into prior to December 15, 2017 is grandfathered and still deductible.
- Charitable Contributions: Taxpayers who are able to itemize deductions can still include charitable contributions. The current limitation to 50% of income is increased to 60%.
- Casualty Losses: Deductions for unexpected losses to personal property are no longer deductible unless covered by specific federal disaster declaration.
- Wagering Losses: The meaning of losses from wagering transactions (i.e. gambling) is clarified to include other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity (e.g. travel expenses to or from a casino).
Planning Comment: There are two big changes/challenges in this area. First, since the SALT deduction is capped at $10,000, that means that you have to close a gap of anywhere between $2,000 – $14,000 to keep itemizing depending on your filing status. As such, we suspect that single homeowners may still find themselves itemizing, but those filing as married filing joint may not (unless they pay a significant amount of mortgage interest).
The second area revolves around the removal of the items that were subject to a 2% floor of your income. So, if you previously deducted any of the items listed below, know that you will not be able to claim them after filing your 2017 tax return:
- work-related travel, transportation, meal, and entertainment expenses
- depreciation on a computer or cellular telephone your employer requires you to use in your work
- dues to a chamber of commerce (or professional societies) if membership helps you do your job
- education (work-related)
- home office expenses for part of your home used regularly and exclusively in your work
- legal fees
- subscriptions to professional journals and trade magazines related to your work
- tools and supplies used in your work
- union dues and expenses
- work clothes and uniforms (if required and not suitable for everyday use)
- tax preparation fees
Child Tax Credit
The child tax credit will increase to $2,000 per qualifying child and will be refundable up to $1,400 (subject to phaseouts). Phaseouts, which are not indexed for inflation, will begin with adjusted gross income of more than $400,000 for those filing as married filing jointly or $200,000 for all other taxpayers.
Non-Child Dependent Credit
A new $500 non-refundable credit covers dependents who don’t qualify for the child tax credit, such as children who are age 17 and above or dependents with other relationships (such as elderly parents). You can’t claim the credit for yourself (or your spouse under married filing jointly status).
The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages. Taxable income attributable to net unearned income will be taxed according to the brackets applicable to trusts and estates. The rules for tax applicable to earned income are unchanged.
Student Loan Interest Deduction
For 2018, the maximum amount that you can deduct for interest paid on student loans remains at $2,500. Phaseouts apply for taxpayers with modified adjusted gross income (MAGI) in excess of $65,000 ($135,000 for joint returns) and is completely phased out for taxpayers with modified adjusted gross income (MAGI) of $80,000 or more ($165,000 or more for joint returns).
Section 529 Plans
Distributions of up to $10,000 per beneficiary can be used for tuition expenses for public, private or religious elementary or secondary school. The limitation applies on a per student basis rather a per account basis. Distributions can also be made for expenses related to homeschool.
Discharged of Student Loan Indebtedness
The exclusion from income resulting from the discharge of student loan debt is expanded to include discharges resulting from death or disability of the student.
The bill retains the present law above-the-line deduction of $250 (indexed for inflation) for out-of-pocket expenses.
Bicycle Commuting Reimbursement
The exclusion from gross income and wages for qualified bicycle commuting reimbursements up to $20 is suspended.
Moving Expense Deduction
Moving expenses related to a job change are no longer deductible except for active members of the military.
Beginning with divorces in 2019, alimony payments to an ex-spouse are no longer deductible and not taxable to the recipient.
Affordable Care Act
The penalty for failing to maintain minimum essential coverage for individuals (individual mandate) is repealed beginning in 2019.
Estate Tax Exemption
The estate and gift tax exemption is doubled for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The exemption increases to $11,200,000 in 2018. The generation skipping transfer (GST) tax exemption is also doubled.