The "Tax Cuts and Jobs Act” was passed by Congress on December 20, 2017 and signed by the President on Dec. 22, 2017. Here is summary of the major changes that might apply to Individual Taxpayers. These changes are effective for tax years beginning after Dec. 31, 2017 and before January 1, 2026, unless specifically indicated.
Individual Taxpayer Changes
Tax Rates and Brackets –They have approved seven (7) tax rate/brackets from 10% - 37% (prior tax rate/brackets were 10%-39.6%)
The Act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-Act law, but indexes them for inflation using C-CPI-U in tax years after Dec. 31, 2017. For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for trusts and estates, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.
Increased Standard Deduction and Elimination of Exemptions - The standard deduction is going to increase to $24K for married, $12K for single and $18K for head of household, which will eliminate the need for many taxpayers to itemize their deductions. They have also eliminated the personal exemption which is a deduction received for each dependent you claim on your tax return (prior law was $4,150 per dependent).
State and Local Income Tax and Property Tax Deductions – The tax deduction for these items is going to be limited to $5K per year for married filing separate taxpayers and $10,000 for any other filing status. Any excess is not tax deductible. State and local property taxes, and state and local sales taxes, are still deductible when paid or accrued in carrying on a trade or business such as rental property or office in home.
Medical Expenses – The medical expense deduction for both 2017 and 2018 have lowered the threshold from 10% to 7.5% of AGI.
Mortgage Interest Deduction – For mortgages entered into contract after 12/15/17, the interest deduction is available on mortgages up to $750,000 for the new purchase of a first or second home. There will no longer be a mortgage interest deduction on home equity loans and equity lines of credit. Refinancing of current mortgages is still subject to the $1 million limitation as long as the amount of indebtedness is not being increased.
Miscellaneous Itemized Deductions – Miscellaneous Itemized deductions subject to exceed 2% of the taxpayer’s adjusted gross income have been suspended. This includes amount paid to your tax preparer, union dues, amount paid for a safe deposit box, investment management fees and unreimbursed employee job expenses.
Child Tax Credit - The child tax credit has increased to the amount to $2,000/child as well as increasing the age for applicable children to the age of 17. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).
Non-Child Dependent Credit – A temporary credit has been created for a non-child dependent, age 17 or older, including parents and adult children with disabilities, of $500 per person.
Alternative Minimum Tax (AMT) – They decided NOT to repeal the AMT for individual taxpayers, but the AMT is going to affect less taxpayers since the AMTI exemption begins at $109,400 for MFJ ($86,200 in 2017), $70,300 for single taxpayers and $54,700 for married filing separately. The 25% phaseout begins at $1 million for MFJ and $500,000 for all other filers.
Mandate Penalty (Obamacare penalty) – The mandate penalty for those who choose not to purchase health insurance has been repealed in tax years after December 31, 2018.
Alimony – Divorce and separation agreements executed after 12/31/2018 that include alimony payments will no longer be used on tax returns. The payor will no longer be allowed to deduct it on his/her taxes and the payee will no longer need to claim the income on his/her tax return. This change will also apply to pre 12/31/2018 divorce agreements that are modified after 12/31/2018.
Gift Tax Exemption – For the tax year beginning after 12/31/2017, you are able to gift up to $15,000 without having to file a gift tax return.
Moving Expenses – The moving expense deduction has been repealed with the exception of certain members of the military. This repeal also suspends the tax-free reimbursement of moving expenses from employers.
Kiddie Tax - The kiddie tax applies to a child if: (1) the child had not reached the age of 19 by the close of the tax year, or the child was a full-time student under the age of 24, (2) the child's unearned income exceeded $2,100 (for 2018); and (3) the child did not file a joint return. Taxable income of a child attributable to net unearned income (dividends, interest, capital gains, etc.) is taxed according to the brackets applicable to trusts and estates.
529 Plan Expanded Use – For distributions after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
Estate and Gift Tax Retained with Increased Exemption - For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption. For estate exemption is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).
Roth IRA “Recharacterizations” Repealed -For tax years beginning after Dec. 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion.