The new Tax Cuts and Jobs Act (TCJA), signed into law in late 2017, makes extensive tax law changes that affect individuals, businesses and corporations.
Following is a summary of key changes and other important information.
Individual income tax rates
The new tax law will retain seven ordinary income tax brackets.
2017 law: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
2018 TCJA law: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Standard deduction, itemized deductions and personal exemptions
The new law: The standard deduction is significantly increased ($24,000 MFJ and $12,000 Single), and the additional standard deduction amounts for those over age 65 or blind are still available. The personal and dependency exemptions are no longer available.
Many itemized deductions are eliminated or restricted. The overall limitation on itemized deductions based on the amount of your adjusted gross income is eliminated. The new law:
- Temporarily reduces the unreimbursed medical expenses threshold
The 10% of Adjusted Gross Income (AGI) floor for the deduction of medical expenses is reduced temporarily to 7.5% in 2017 and 2018 (for regular tax and alternative minimum tax). After 2018, the medical expense deduction reverts back to the 10% of AGI threshold.
- Limits state and local tax deduction
The deduction for state and local taxes is limited to $10,000 worth of deductions which includes a combination of property taxes and either a sales tax or state income tax.
- Limits mortgage interest deduction and suspends home equity interest deduction in many cases
The deduction for mortgage interest (acquisition indebtedness) is capped at loans of $750,000 starting 1/1/2018. Home equity loans for other than home purchase, remodel, etc., are no longer deductible (cars, vacations, etc.)
- Changes charitable contribution rules
Beginning in 2018 the 50% limitation for charitable contributions of cash to public charities is increased to 60%. Taxpayers will no longer receive a charitable deduction for payments made to colleges and universities for athletic event seating rights.
- Changes casualty loss deduction
The deduction for personal casualty losses is eliminated unless the loss is incurred in a federally declared disaster.
- Eliminates miscellaneous itemized deductions
All miscellaneous itemized deductions are repealed beginning in 2018. This includes investment advisory fees, tax preparation expenses, unreimbursed employee business expenses (home office deduction) annuity and IRA/ROTH basis losses, safety deposit fees, plus other assorted fees for “production of income.”
- Repeals the overall limitation on itemized deductions
Phaseout of itemized deductions at certain income thresholds are eliminated.
- These provisions sunset and revert to pre-existing law after 2025
Child tax credit enhancement
The maximum child tax credit is increased to $2,000 per child under age 17. Up to $1,400 of credit will be refundable. A $500 credit is available for non-child dependents. New law phases out $50 for each $1,000 of AGI over $400,000 (married filing jointly) or $200,000 (single). Taxpayers may be eligible for “additional tax credit” on earned income in excess of $2,500. The changes to the child tax credit sunset and revert to pre-existing law after 2025.
Extends use of 529 plans to primary and secondary education
Beginning in 2018, distributions of $10,000 per student each year from 529 plans will be tax-free for elementary and secondary school expenses — includes public, private or religious schools. Currently Coverdell accounts can be used for K-12 also, but have smaller contribution amounts and income limits. Tax-free rollover from Coverdell to 529 is allowed. *Many states may need to take state legislative action to enable the expansion of 529 qualified distributions as state tax-free and, if applicable, for state tax incentives.
Ends deduction for alimony payments
Taxpayers paying alimony to an ex-spouse through a divorce or separation instrument executed after December 31, 2018 will no longer be able to deduct those payments from their AGI. Likewise, alimony payments received by a taxpayer will no longer be treated as taxable income. This rule will also apply to alimony payments arising from a divorce or separation instrument executed on or before December 31, 2018, and modified after that date if the modification expressly provides that this new law applies to the modification.
Capital gains tax
Under TCJA, the three capital gains income thresholds don’t match up perfectly with the tax brackets. Instead, they are applied to maximum taxable income levels, as follows for 2018 and beyond: The 0% capital gains rate applies up to $77,200 for married taxpayers filing jointly, up to $38,600 for single taxpayers, and up to $2,600 for estates and trust. The 15% capital gains rate applies up to $479,000 for married taxpayers filing jointly, up to $425,800 for single taxpayers, and up to $12,700 for estates and trusts. The 20% capital gains rate applies to any long-term capital gains and qualified dividends that exceed the 15% thresholds noted above.
Alternative minimum tax will affect fewer taxpayers
Both the exemption amount and exemption amount phase outs are increased. New exemption amounts: $109,400 for married filing jointly, $70,300 for single. New phaseouts: $1,000,000 married and $500,000 single.
Simplifies kiddie tax
Instead of taxing most unearned income of children at their parents’ tax rates (as under pre-existing law), TCJA taxes children’s unearned income using the trust and estate income tax brackets. This provision sunsets and reverts to pre-existing law after 2025.
Doubles the estate, gift and generation-skipping transfer tax exemptions
TCJA doubles the gift and estate tax basic exclusion amount and the generation-skipping transfer tax exemption to about $11,200,000 in 2018. The increased levels expire after 2025.
Health insurance individual mandate
TCJA eliminates the requirement that individuals must be covered by a health care plan that provides at least minimum essential coverage or pay a penalty tax (the individual shared responsibility payment) for failure to maintain the coverage. This provision is effective for months beginning after December 31, 2018.
Retirement plans
Under TCJA, the contribution levels for retirement plans remain the same. However, TCJA repeals the special rule permitting a recharacterization to unwind a Roth conversion.
Inflation
The IRS will switch to an inflation index known as the chained CPI. Chained CPI is considered a more accurate measure, but rises somewhat more slowly than the traditional CPI. That would mean bracket thresholds and tax credits, for example, would rise more slowly. This could have the effect over time of pushing more people into higher tax brackets and reducing the purchasing power of tax credits.
Special provisions for business income of individuals
Under TCJA, an individual taxpayer can deduct 20% of domestic qualified business income (excludes compensation) from a partnership, S corporation, or sole proprietorship. The benefit of the deduction is phased out for specified service businesses with taxable income exceeding $157, 500 ($315,000 for married filing jointly). The deduction is limited to the greater of (1) 50% of the W-2 wages of the taxpayer, or (2) the sum of (a) 25% of the W-2 wages of the taxpayer, plus (b) 2.5% of the unadjusted basis immediately after acquisition of all qualified property (certain depreciable property). This limit does not apply if taxable income does not exceed $157,500 ($315,000 for married filing jointly), and the limit is phased in for taxable income above those thresholds. This provision sunsets and reverts to pre-existing law after 2025.
Corporations
While there are a number of modifications that corporations will need to comply with, the most notable is that all corporate taxable income will be taxed at 21%. Other issues range from the repeal of corporate AMT to changes in deductions for business entertainment expenses and more.
Ask your D.A. Davidson Financial Advisor for our 2017-2018 TAX UPDATE fact sheet with more detailed side-by-side comparisons.
Source: Tax Cuts and Jobs Act
This material is intended for general consumer educational purposes and is not intended to provide legal, tax or investment advice. D.A. Davidson does not provide tax or legal advice. Questions about legal or tax implications should be discussed with your accountant, tax advisor and/or attorney.