The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law on December 22, 2017. It represents the most extensive tax legislation in over 30 years. Here is a summary of some of the key changes affecting individual taxpayers. Most of which take effect for 2018 and expire after 2025.
Tax rates, brackets and inflation adjustments
The TCJA keeps seven income tax brackets, reduces marginal tax rates at almost all levels of taxable income and shifts the thresholds for several income tax brackets. The top marginal rate falls from 39.6 to 37 percent. The remaining rates are 10, 12, 22, 24, 32 and 35 percent. The brackets will continue to be adjusted for inflation.
Personal exemptions and standard deduction
For 2018–2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for single filers,, $18,000 for heads of households and $24,000 for married filing joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.
Family tax credits
Beginning in 2018, the TCJA doubles the child credit to $2,000 per child under age 17. Where a taxpayer’s credits exceed his or her tax liability, the maximum amount refundable is limited to $1,400 per child..
Under the new law, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000.
Moving expenses
The deduction for work-related moving expenses is suspended for 2018–2025, except for active-duty members of the Armed Forces (including their spouses or dependents) who move because of a military order that calls for a permanent change of station.
Alimony payments
For divorce agreements executed after December 31, 2018, alimony payments won’t be deductible and will be excluded from the recipient’s taxable income. This change is permanent.
Itemized deductions
- State and local tax deduction. For 2018–2025, taxpayers can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and either income or sales taxes.
- Mortgage interest deduction. For 2018–2025 a taxpayer can deduct interest only on mortgage debt of up to $750,000. However, the limit remains at $1 million for mortgage debt incurred before December 15, 2017.
- Home equity interest deduction. The new law suspends the deduction for interest on home equity debt for 2018–2025. However, home equity debt interest might still be deductible if the funds are used for a purpose where interest otherwise may be deductible, such as for home-improvement, investment or business purposes.
- Medical expense deduction. Qualified medical expenses are deductible only to the extent they exceed the applicable AGI threshold. The TCJA reduces the threshold from 10% of AGI to 7.5% for all taxpayers for both regular and AMT purposes in 2017 and 2018.
- Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018–2025.
- Personal casualty and theft loss deduction. For 2018–2025, this deduction is suspended except if the loss was due to an event officially declared a disaster by the President.
- Charitable contribution deduction. For 2018–2025, the limit on the deduction for cash donations to public charities is raised to 60% of AGI from 50%. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated.
- Elimination of the AGI-based reduction of certain itemized deductions. Under pre-TCJA law, if AGI exceeds the applicable threshold, certain deductions were reduced by 3% of the AGI amount over the threshold (not to exceed 80% of otherwise allowable deductions). For 2018–2025, the reduction is suspended.
Alternative Minimum Tax (AMT)
The AMT is a separate tax system that limits some deductions, disallows others and treats certain income items differently. The top AMT rate of 28% is lower than the top regular income tax rate, but it typically applies to a higher taxable income base. If your AMT liability exceeds your regular tax liability, you must pay the AMT.
The TCJA temporarily reduces the number of taxpayers who’ll have to pay the AMT by increasing both the AMT exemption amount to $109,400 for married filing jointly and $70,300 for single filers and heads of households. Also, the AMT exemption phaseout thresholds have been increased to $1 million for married couples and $500,000 for all other taxpayers other than estates and trusts. These amounts apply for 2018 and will be annually adjusted for inflation until the provision expires after 2025.
“Kiddie” tax
Under pre-TCJA law, when the kiddie tax applies, all but a small portion of a child’s unearned income is taxed at the parents’ marginal rate (if higher). The kiddie tax generally applies to children age 18 or younger, as well as to full-time students age 19 to 23 (with some exceptions).
The TCJA makes the kiddie tax taxes a child’s unearned income according to the tax brackets used for trusts and estates, which are taxed at the highest marginal rate (37% for 2018) once 2018 taxable income reaches $12,500.
529 savings plans
529 plan distributions used to pay qualifying education expenses are generally tax-free. For distributions made after December 31, 2017, the definition of qualified education expenses has been expanded to include not just post-secondary school expenses but also primary and secondary school expenses.
Individual mandate
The TCJA eliminates the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty, effective for months beginning after December 31, 2018.
There is a an excellent summary provided by the IRS on the TCJA: IRS Publication 5307
The IRS website also provides detailed resources on each of the above topics: www.irs.gov