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The Tax Cuts and Jobs Act: Impact on Individuals
Feb 09, 2018
By Carol A. Magyar, CPA, MST
Come tax season next year, American taxpayers will come face to face with the Tax Cuts and Jobs Act (TCJA), and will learn definitively how it will affect them personally when they file their 2018 income tax returns. In the meantime, certain taxpayers may find it beneficial to immediately revisit their personal tax planning, and put some changes in place now that will be beneficial under the new tax law.
One thing is certain. The largest overhaul of the U.S. tax code in 30 years will simplify tax season for millions of individual taxpayers who find that their favorite deductions are gone. Moreover, those tax breaks that still exist will be irrelevant to millions more taxpayers who find that they’ll pay less tax if they just take the standard deduction rather than itemizing.
The most important benchmark change made by the TCJA is lower tax rates for taxpayers at nearly all income levels. (Click here for new income tax rates and brackets.)
New tax withholding tables have been issued by the IRS, and many employees have already seen an increase in their take-home pay.
Following is a description of some notable changes that the TCJA provides for individual taxpayers at all points on the income spectrum. This is not an exhaustive list, and does not include significant changes in estate taxes or international taxes. In the coming months, we will be examining the TCJA more closely and informing you about further changes that may affect you, your family and your business.
Important note: Many of the provisions of the TCJA that impact individuals are made temporary by the law, generally sunsetting on December 31, 2025. What Congress may do between now and then to make any of these provisions permanent is anyone’s guess. Where applicable, we have noted which provisions are subject to the 2025 sunset.
Under the old law, miscellaneous deductions were allowed for numerous items, such as employee business expenses, tax preparation fees and investment interest expenses.
How it is changed: Under the TCJA, most miscellaneous deductions are gone or modified. (See accompanying chart for information about specific deductions.)
Suspension of Personal Exemptions
The old tax law allowed for an exemption deduction from adjusted gross income of $4,150 each for a taxpayer, the taxpayer’s spouse and each of their dependent children. This benefited taxpayers - particularly those with large families - by significantly lowering their adjusted gross income (AGI).
How it is changed: The TCJA suspends the personal exemption by reducing it to zero for the tax years 2018 through 2025.
Impact: Taxpayers will lose an important tool for lowering their AGI and taxes. Some taxpayers will make up the loss of the personal exemption with the higher standard deduction, higher Child Tax Credit (see below), and lower tax rates, but others may not.
Doubling of the Standard Deduction
Under previous law, the standard deductions for 2018 would have been $13,000 for joint filers, $6,500 for single filers and $9,550 for heads of household.
How it is changed: The standard deduction has been temporarily increased to $24,000 for joint filers ($12,000 for singles and $18,000 for heads of household).
Impact: Millions of taxpayers whose total itemized deductions fell below $24,000 will find it more beneficial to take the standard deduction. Without having to itemize, this will simplify tax return preparation for certain taxpayers, and potentially curb costs of return preparation.
Special note: This provision sunsets on Dec. 31, 2025.
Kiddie Tax Modification
Under the old law, the net unearned income of children under age 19 (or 24 if full-time college students) generally was taxed at the parents’ tax rates if their rates were higher than the child’s. If the child had earned income, it was taxed at the child’s lower rate.
How it is changed: Under the new law, the child’s unearned income is decoupled from the parents’ tax rates, and is instead taxed at the rate applicable to trusts and estates. Those rates vary, but generally are higher than individual rates.
Impact: Since the highest estate and trust tax rate of 37% kicks in at $12,500 in income, children with net unearned income will hit the highest bracket sooner than they might have under previous law.
Child Tax Credit Increase
Under previous law, a taxpayer could claim a tax credit of up to $1,000 for each qualifying child under age 17. The phase-out for this credit began at $110,000 AGI for joint filers and $75,000 for singles. For taxpayers whose tax liability was less than the amount of the credit, a portion of the Child Tax Credit was refundable.
How it is changed: Starting in tax year 2018, the maximum Child Tax Credit is doubled to $2,000, with the phase-out level raised to $400,000 for joint filers and $200,000 for all others. The refundable portion for qualifying taxpayers is increased to $1,400.
Special note: The TCJA imposes a new requirement of a Social Security Number for any child for whom the Child Tax Credit is claimed. Previous law required either the SSN or a Taxpayer Identification Number. This new requirement may impact the ability of immigrant families to claim this credit.
Alternative Minimum Tax (AMT)
Under previous law, many taxpayers were subject to the deeply unpopular AMT, even at relatively moderate income levels.
How it is changed: Exemption amounts are significantly higher. Additionally, the phase-out is much higher - $1 million for joint returns and surviving spouses, and $500,000 for all others.
Impact: Substantially fewer individual taxpayers will be subject to the AMT.
Expanded Use of 529 Education Account Funds
Under previous law, funds in a 529 college savings account could be used only for qualifying higher education expenses, including tuition, fees, books, supplies, required equipment, room and board. Eligible schools included colleges, universities, vocational schools, and other postsecondary schools.
How it is changed: The TCJA expands the use of 529 funds to include tuition at public, private or religious elementary and secondary schools, up to $10,000 per year.
State and Local Tax Deductions Limited
Under previous law, taxpayers could deduct the full amount of state taxes, local taxes (i.e. property taxes), and/or sales taxes.
How it is changed: The new law temporarily limits these deductions to a total of $10,000 in the aggregate. This means that if the total state and local taxes (income taxes, real estate taxes, excise taxes) that a taxpayer paid amounts to more than $10,000, the taxpayer may not deduct them in full. The deduction tops out at $10,000.
An exception is made regarding state and local taxes paid or accrued in carrying out a business or trade. For taxpayers who qualify under that exception, state and local taxes are still fully deductible.
Impact: This is one of the most controversial provisions in the TCJA, and will hit taxpayers particularly hard in states with high income taxes and real estate taxes.
Deduction of Residential Mortgage Interest
One of America’s favorite deductions dodged a bullet in this round of tax reform, as the TCJA retains the home mortgage interest deduction, although shaved down slightly. Under the old law, mortgage interest on a principal or second residence was deductible for loans valued up to $1 million for joint filers ($500,000 for married taxpayers filing separately). Interest on home equity loans was deductible for loans up to $100,000.
How it is changed: Starting in tax year 2018 and extending through 2025, the deduction for interest on home equity loans is suspended, except in cases where the equity loan proceeds are used to acquire or substantially improve a first or second home. For mortgages, interest expense may be deducted for loans valued up to $750,000 ($375,000 for married taxpayers filing separately).
Impact: Taxpayers will need to keep detailed documentation as to how home equity loan proceeds are used.
Special note: Mortgages that were entered into prior to December 15, 2017, are grandfathered, so the interest is deductible for loans up to $1 million in value. However, home equity loans are not grandfathered, so the interest on them is no longer deductible no matter when a loan was entered into.
This provision sunsets in 2025.
The new law retains the old rates – 0%, 15% and 20% - for taxation of capital gains, as well as the old income break points.
How it is changed: Starting in 2018, the income breakpoints will be indexed for inflation, along with the standard tax rates and brackets. Breakpoints between the 0% and 15% rates, and the 15% and 20% rates, are the same amounts as under previous law. For 2018, the 15% breakpoint is $77,200 for married filing jointly ($38,600 for single). The 20% breakpoints are $479,000 for married filing jointly ($425,800 for single).
The federal government no longer wants to be involved in your personal business, at least when it comes to alimony.
How it is changed: Starting in 2019, alimony payments are no longer deductible for the paying spouse, and no longer must be included as income for the receiving spouse. This provision affects only divorce agreements executed or modified after December 31, 2018.
The Affordable Care Act, enacted in 2010, requires most Americans (other than those who qualified for a hardship exemption) to carry a minimum level of health coverage or face a tax penalty of up to $2,085. This provision is known as the “individual mandate.”
How it is changed: The TCJA reduces the penalty imposed by the individual mandate to $0 starting in the 2019 tax year.
Medical Expense Deduction
Under the current law, which applies to the 2017 and 2018 tax years, taxpayers can deduct out-of-pocket medical expenses if they exceed 7.5% of adjusted gross income. As of the 2019 tax year, the TCJA raises that percentage to 10%.
Limit on Itemized Deductions
Under the old law, itemized deductions were limited for taxpayers with adjusted gross income above certain levels.
How it is changed: This provision, known as the “Pease Limitation,” is repealed.
The TCJA raises the limit on deductibility of charitable contributions. Taxpayers now may deduct contributions equal to 60% of their adjusted gross income, up from 50%. This applies only to cash contributions and not donations of stock, artwork or other goods.
Personal Casualty Loss Deduction
The TJCA repeals this deduction, which enabled taxpayers who suffered property losses that were not covered by insurance to deduct their out-of-pocket costs. However, the deduction still is allowed for losses incurred in a federally-declared disaster zone.
See accompanying charts for 2018 Tax Rates and Brackets and Popular Tax Breaks Lost or Limited Under the Tax Cuts and Jobs Act.
This is not an exhaustive list of the changes in the Tax Cuts and Jobs Act. We will continue to inform you in the coming months of other changes that may affect you, your family and your business. In the meantime, if you have any questions about the TCJA and how you can prepare for its impact, please contact Carol A. Magyar, CPA, MST .
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