Summary of the New Tax Law – Individual Tax

January 12, 2018

On 12/20/17, both the House and Senate passed H.R. 1-commonly referred to as the Tax Cuts and Jobs Act (TCJA). The President then signed it in to law. Hailed as the largest major tax reform in over three decades, the TCJA contains a whole host of tax provisions that impact individuals and businesses. With a few rare exceptions, the provisions of the TCJA affect 2018 tax returns. However, now is the time to become familiar with this massive and groundbreaking act.

The following is a summary of the provisions in the new law affection individual taxpayers.

New Tax Rates and Brackets. For tax years 2018-2025, seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Kiddie Tax Modified. Under pre-TCJA law, pursuant to the “kiddie tax” provisions, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child. The remainder of the child’s taxable income [i.e., earned income, plus unearned income up to $2,100 (for 2018), less the child’s standard deduction] was taxed at the child’s rates.

For tax years 2018-2025, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.

Personal Exemption Deduction Eliminated. Under pre-TCJA law, the deduction for each personal exemption was $4,150 for 2018, subject to a phaseout for higher earners. For tax years 2018-2025, the deduction for personal exemptions is eliminated.

Standard Deduction Increased. Under pre-TCJA law, for 2018, the standard deduction amounts were to be: $6,500 for single individuals and married individuals filing separately, $9,550 for heads of household, and $13,000 for married individuals filing jointly (including surviving spouses). Additional standard deductions may be claimed by taxpayers who are elderly or blind.

For tax years 2018-2025, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.

State and Local Tax Deduction Limited. For tax years 2018-2025, a taxpayer’s itemized deduction for state and local taxes is limited to $10,000 ($5,000 for a married taxpayer filing a separate return) of the aggregate of (1) state and local property taxes and (2) state and local income taxes. The provision also includes a rule stating that an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for tax years beginning after 2017. To prepay property taxes however, the tax has to be “assessed” before January 1, 2018.

Mortgage and Home Equity Indebtedness Interest Deduction Limited. Under pre-TCJA law, taxpayers could deduct as an itemized deduction qualified residence interest, which included interest paid on a mortgage secured by a principal residence or a second residence. The underlying mortgage loans could represent acquisition indebtedness of up to $1 million, plus home equity indebtedness of up to $100,000.

For tax years 2018-2025, the deduction for interest on home equity indebtedness is eliminated and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately), The new lower limit doesn’t apply to any acquisition indebtedness incurred before 12/15/17.

Charitable Contribution Deduction Limitation Increased. For contributions made in tax years after 2017, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%.

Charitable Contribution Deduction for College Athletic Seating Rights Eliminated. For tax years after 2017, no charitable deduction will be allowed for any payment to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event.

Casualty and Theft Loss Deduction Eliminated. For tax years 2018-2025, the personal casualty and theft loss deduction is eliminated, except for personal casualty losses incurred in a federally-declared disaster area.

New Deduction for Business Income from Pass-through Entities and Sole Proprietorships. For tax years 2018-2025, an individual generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified Real Estate Investment Trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. The 20% deduction is not allowed in computing Adjusted Gross Income (AGI), but rather is allowed as a deduction reducing taxable income.

A limitation based on W-2 wages paid is phased in for married filing joint taxpayers with taxable income of $315,000 or more ($157,500 for other individuals). A disallowance of the deduction with respect to specified service trades or businesses also is phased in above these threshold amounts of taxable income. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.

Alimony Deduction by Payor and Income Inclusion by Payee Repealed. For any divorce or separation agreement executed after 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

Moving Expense Deduction and Reimbursements Eliminated.  For tax years 2018-2025, the deduction for moving expenses and the income exclusion for qualified moving expense reimbursements is eliminated, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station.

Child Tax Credit Increased. For tax years 2018-2025, the child tax credit is increased from $1,000 to $2,000 per qualifying child under the age of 17, and other changes are made to phase-outs and refundability during this same period.

Nonchild Dependents. A $500 nonrefundable credit is provided for certain nonchild dependents.

Estate and Gift Tax Retained with Increased Exemption Amount. Under pre-TCJA law, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this “basic exclusion amount” was $5.6 million ($11.2 million for a married couple).

For estates of decedents dying and gifts made after 2017 and before 2026, the TCJA doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

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