Dear Client,
The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping
tax package. Here's a look at some of the more important elements of the new
law that have an impact on individuals. Unless otherwise noted, the changes are
effective for tax years beginning in 2018 through 2025.
·
Tax rates. The new law imposes a new tax rate
structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The
top rate was reduced from 39.6% to 37% and applies to taxable income above
$500,000 for single taxpayers, and $600,000 for married couples filing jointly.
The rates applicable to net capital gains and qualified dividends were not
changed. The “kiddie tax” rules were simplified. The net unearned income of a
child subject to the rules will be taxed at the capital gain and ordinary
income rates that apply to trusts and estates. Thus, the child's tax is
unaffected by the parent's tax situation or the unearned income of any
siblings.
·
Standard deduction. The new law increases the standard
deduction to $24,000 for joint filers, $18,000 for heads of household, and
$12,000 for singles and married taxpayers filing separately. Given these
increases, many taxpayers will no longer be itemizing deductions. These figures
will be indexed for inflation after 2018.
·
Exemptions. The new law suspends the deduction for
personal exemptions. Thus, starting in 2018, taxpayers can no longer claim
personal or dependency exemptions. The rules for withholding income tax on
wages will be adjusted to reflect this change, but IRS was given the discretion
to leave the withholding unchanged for 2018.
·
New deduction for
“qualified business income.” Starting in 2018, taxpayers are allowed a deduction equal
to 20 percent of “qualified business income,” otherwise known as “pass-through”
income, i.e., income from partnerships, S corporations, LLCs, and sole
proprietorships. The income must be from a trade or business within the U.S.
Investment income does not qualify, nor do amounts received from an S
corporation as reasonable compensation or from a partnership as a guaranteed
payment for services provided to the trade or business. The deduction is not
used in computing adjusted gross income, just taxable income. For taxpayers
with taxable income above $157,500 ($315,000 for joint filers), (1) a
limitation based on W-2 wages paid by the business and depreciable tangible
property used in the business is phased in, and (2) income from the following
trades or businesses is phased out of qualified business income: health, law,
consulting, athletics, financial or brokerage services, or where the principal
asset is the reputation or skill of one or more employees or owners.
·
Child and family tax
credit. The new law
increases the credit for qualifying children (i.e., children under 17) to
$2,000 from $1,000, and increases to $1,400 the refundable portion of the
credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer's
dependents who are not qualifying children. The adjusted gross income level at
which the credits begin to be phased out has been increased to $200,000
($400,000 for joint filers).
·
State and local taxes. The itemized deduction for state and
local income and property taxes is limited to a total of $10,000 starting in
2018. For tax years 2018 through 2025, TCJA limits deductions for taxes paid by
individual taxpayers in the following ways:
·
. . . It limits the
aggregate deduction for state and local real property taxes; state and local
personal property taxes; state and local, and foreign, income, war profits, and
excess profits taxes; and general sales taxes (if elected) for any tax year to
$10,000 ($5,000 for marrieds filing separately). Important exception: The $10,000 limit doesn't apply to: (i)
foreign income, war profits, excess profits taxes; (ii) state and local, and
foreign, real property taxes; and (iii) state and local personal property taxes
if those taxes are paid or accrued in carrying on a trade or business or in an
activity engaged in for the production of income.
·
. . . It completely
eliminates the deduction for foreign real property taxes unless they are paid
or accrued in carrying on a trade or business or in an activity engaged in for
profit.
To prevent avoidance of the $10,000 deduction limit by
prepayment in 2017 of future taxes, the TCJA treats any amount paid in 2017 for
a state or local income tax imposed for a tax year beginning in 2018 as paid on
the last day of the 2018 tax year. So 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 $10,000 aggregate limitation.
·
Mortgage interest. Under the new law, mortgage interest on
loans used to acquire a principal residence and a second home is only
deductible on debt up to $750,000 (down from $1 million), starting with loans
taken out in 2018. And there is no longer any deduction for interest on home
equity loans, regardless of when the debt was incurred.
·
Miscellaneous itemized
deductions. There is no longer a deduction for miscellaneous itemized
deductions which were formerly deductible to the extent they exceeded 2 percent
of adjusted gross income. This category included items such as tax preparation
costs, investment expenses, union dues, and unreimbursed employee expenses.
·
Medical expenses. Under the new law, for 2017 and 2018,
medical expenses are deductible to the extent they exceed 7.5 percent of
adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10%
for most taxpayers.
·
Casualty and theft
losses. The itemized
deduction for casualty and theft losses has been suspended except for losses
incurred in a federally declared disaster.
·
Overall limitation on
itemized deductions. The new law
suspends the overall limitation on itemized deductions that formerly applied to
taxpayers whose adjusted gross income exceeded specified thresholds. The
itemized deductions of such taxpayers were reduced by 3% of the amount by which
AGI exceeded the applicable threshold, but the reduction could not exceed 80%
of the total itemized deductions, and certain items were exempt from the
limitation.
·
Moving expenses. The deduction for job-related moving
expenses has been eliminated, except for certain military personnel. The
exclusion for moving expense reimbursements has also been suspended.
·
Alimony. For post-2018 divorce decrees and
separation agreements, alimony will not be deductible by the paying spouse and
will not be taxable to the receiving spouse.
·
Health care
“individual mandate.” Starting in
2019, there is no longer a penalty for individuals who fail to obtain minimum
essential health coverage.
·
Estate and gift tax
exemption. Effective for
decedents dying, and gifts made, in 2018, the estate and gift tax exemption has
been increased to roughly $11.2 million ($22.4 million for married couples).
·
Alternative minimum
tax (AMT) exemption. The AMT has been
retained for individuals by the new law but the exemption has been increased to
$109,400 for joint filers ($54,700 for married taxpayers filing separately),
and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers
with alternative minimum taxable income over $1 million for joint filers, and
over $500,000 for all others.
As you can see from this overview, the new law affects many
areas of taxation. If you wish to discuss the impact of the law on your
particular situation, please give me a call.
Disclaimer: Results may varied by taxpayer, and this is not pretend to be all inclusive in nature. Please consult your Tax Advisor for more information and how these provision may impact your tax situation.
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