Today, President Trump signed the reconciled tax reform bill–commonly called the “Tax Cuts and Jobs Act” (TCJA)–which represents the most sweeping federal tax legislation in more than three decades. While many of the new law’s provisions affect businesses, it also includes significant changes for individual taxpayers, most of which take effect for 2018 and expire after 2025. Here are some of the most notable changes.
Tax brackets
The TCJA maintains seven income tax brackets but temporarily adjusts the tax rates as follows:
2017 2018-2025
10% 10%
15% 12%
25% 22%
28% 24%
33% 32%
35% 35%
39.6% 37%
The top rates, which currently kick in at $418,400 of taxable income for single filers and $470,700 for joint filers, will now take effect at $500,000 and $600,000, respectively. The brackets will continue to be adjusted for inflation.
Personal exemptions and standard deduction
For 2018–2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings.
But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from the family tax credits.
State and local tax deduction
The deduction for state income and sales taxes was another bone of contention, with congressional representatives from high-tax states protesting its proposed elimination. The deduction ultimately survived but has been scaled back substantially — and, of course, is available only to those who choose to itemize. With the increased standard deduction, it’s expected that fewer taxpayers will do so.
For 2018–2025, taxpayers can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and either income or sales taxes. Note, though, that taxpayers are now explicitly forbidden from claiming an itemized deduction in 2017 for prepayment of state or local income tax for a future year to avoid the dollar limitation applicable for future tax years. It doesn’t, however, include such a prohibition against prepayment of property taxes for a future year.
Family tax credits
The child tax credit doubles to $2,000 per child under age 17 beginning in 2018. The maximum amount refundable (because a taxpayer’s credits exceed his or her tax liability) is limited to $1,400 per child.
The child credit will be available to more families than in the past. The new law more than doubles the levels at which the credit is phased out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with 2017. The phaseout thresholds won’t be indexed for inflation, though, meaning the credit will lose value over time.
Beginning in 2018, there is a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child, parent, sibling, niece or nephew, or aunt or uncle). These provisions all expire after 2025.
Mortgage interest deduction
The TCJA tightens limits on the itemized deduction for home mortgage interest. For 2018–2025, it generally allows a taxpayer to deduct interest only on mortgage debt of up to $750,000. However, the limit remains at $1 million for mortgage debt incurred before December 15, 2017, which will significantly reduce the number of taxpayers affected.
The new law also suspends the deduction for interest on home equity debt: For 2018–2025, taxpayers can’t claim deductions for such interest at all, regardless of when the debt was incurred or how it’s used.
Additional deductions, exclusions and credits
Here are some other tax breaks that have been affected by the TCJA:
Medical expense deduction. This itemized deduction lives on and is, in fact, enhanced for two years. The threshold for deducting such unreimbursed expenses is reduced from 10% of adjusted gross income (AGI) to 7.5% for all taxpayers for both regular and alternative minimum tax (AMT) purposes in 2017 and 2018.
Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018–2025. If you’re an employee and work from home, this includes the home office deduction.
Moving expenses. The deduction for work-related moving expenses is suspended for 2018–2025, except for active-duty members of the Armed Forces (and their spouses or dependents) who move because of a permanent change of station. Similarly the exclusion from gross income and wages for qualified moving expense reimbursements is also suspended except for active-duty families.
Personal casualty and theft loss deduction. For 2018–2025, this deduction is suspended except if the loss was due to an event officially declared a disaster by the President.
Charitable contributions. For 2018–2025, the limit on the deduction for cash donations to public charities is raised to 60% of AGI from 50%. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated. Only available to those who itemize.
Alimony payments. After 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. Because the recipient spouse would typically pay income taxes at a rate lower than the paying spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.
529 plan savings plans. 529 plan distributions used to pay qualifying education expenses are generally tax-free. The definition of qualified education expenses has been permanently expanded to include not just postsecondary school expenses but also primary and secondary school expenses.
AMT and estate tax
The House lost the battle over repeal of the AMT and the estate tax — both continue to apply. But they now apply to fewer taxpayers than in the past.
Beginning in 2018, the new law increases both the AMT exemption amount (to $109,400 for married couples, $70,300 for singles and heads of households, and $54,700 for separate filers) and the AMT exemption phaseout thresholds (to $1 million for married couples and $500,000 for all other taxpayers other than estates and trusts). These amounts will be adjusted for inflation until the provision expires after 2025.
Similarly, the TCJA doubles the estate tax exemption to $10 million for 2018–2025. The exemption is adjusted for inflation and is expected to be $11.2 million for 2018. But because this is temporary, taxpayers with assets in the $5 million to $11 million range (twice that for married couples) will still have to keep estate taxes in mind in their planning.
Roth conversions
Taxpayers who convert a pretax traditional IRA into a posttax Roth IRA lose their ability to later “recharacterize” or reverse the conversion. Those who wish to recharacterize a 2017 Roth conversion must do so by December 31, 2017.
Notably, the TCJA leaves untouched many breaks that would have been reduced or eliminated under the original House or Senate bills, such as the:
- Principal residence gain exclusion,
- Exclusion for employer-provided adoption assistance,
- Lifetime Learning credit,
- Deduction for student loan interest, and
- Deduction for graduate student tuition waivers.
Also on the plus side, the law suspends the overall limitation on itemized deductions for 2018–2025.
Corporations and Not-for-Profits
Additionally, a number of changes will impact corporations and not-for-profits including the following:
- Corporate tax rates will drop to 21%
- Dividends-received deduction will decrease to 50%
- Certain flow-through entities will receive 20% deduction of taxable income
- Bonus depreciation has been increased to 100% of the cost
- Section 179 depreciation has increased to $1 million
- Cash basis of accounting will be allowed if the entity’s gross revenue is less than $25 million
- Construction entities will be allowed to use the completed contract method if sales are less than $25 million and contract completed in 2 years
- The interest expense deduction will be limited to 30% of taxable income
- The net operating loss carryback and carryforward is changed
- The domestic production deduction has been removed
- Entertainment expenses will be disallowed
- An excise tax will be imposed on the compensation of not-for-profit officers greater than $1 million.
Contact us with questions
As with any piece of massive legislation, many questions about implementation and impact linger unanswered. We’ll keep you apprised as more information becomes clear about how the TCJA will affect taxpayers. There are many more arcane issues such as inflation indexes and foreign subsidiaries we are happy to discuss with you.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
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