On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.
The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.
- Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%. While most taxpayers will pay less, some taxpayers will pay slightly more under the new law. Every situation is unique but taxpayers most likely to be impacted with slightly higher taxes are upper-middle class individuals with a marginal tax rate of 35%, up from 33%.
- Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
- Elimination of personal exemptions
- Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit, such as the ability to claim a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit (for children who are too old for the child tax credit, as well as other non-child dependents).
- Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent
- Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018. In 2019, the threshold will increase to 10%.
- New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
- Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers) for new mortgages taken out after December 14, 2017. Taxpayers with a mortgage taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward. The $1 million limit continues to apply to a refinanced mortgage incurred before December 15, 2017.
- Elimination of the deduction for interest on home equity debt
- Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
- Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
- The deduction for charitable contributions is expanded so that taxpayers may contribute up to 60% of adjusted gross income, rather than 50%.
- Elimination of the AGI-based reduction of certain itemized deductions
- Most of the changes to itemized deductions remain in place until 2025 and then itemized deductions will generally follow the rules in place before the TCJA.
- Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
- Alimony payments made under court orders executed after December 31, 2018 will no longer be deductible. Alimony income under similar orders will not be includable in income. Payments made under existing orders are grandfathered and should be reported using the pre-TCJA rules.
- Self-employed taxpayers may be able to deduct up to 20% of qualified business income from a sole proprietorship, partnership or S corporation. Limitations apply to the deductions.
- Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent
- AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
- Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)
Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us.
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