The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law on December 22nd of this year. While many of the new law’s provisions affect businesses, it also includes significant changes for individual taxpayers, most of which take effect for 2018 and expire after 2025. Here are some of the most notable changes:
Adjustments to Inflation
Annual inflation adjustments will now be calculated using the chained consumer price index on a permanent basis, which will increase tax bracket thresholds, the standard deduction, certain exemptions, and other figures at a slower rate than the consumer price index that we use now. This creates the potential to force taxpayers into higher tax brackets and makes different breaks worth less over time. The law adopts the C-CPI-U on a permanent basis.
The new law keeps the seven income tax brackets, but adjusts the tax rates as follows:
The top rates currently kick in at $418,400 of taxable income for single filers and $470,700 for joint filers, will now become $500,000 and $600,000.
Personal Exemptions & Standard Deductions
Currently taxpayers are able to claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For 2018–2025, the TCJA will stop personal exemptions but nearly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. While this may work in favor for some taxpayers, these changes could result in a much higher tax bill for those with many dependents or who itemize deductions.
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings.
But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from the family tax credits.
Family Tax Credits
The TCJA chose to double the child credit to $2,000 per child under age 17 starting in 2018 and made the credit available to more families than before. The maximum amount refundable is limited to $1,400 per child. The TCJA doesn’t phase out the credit until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers. In 2017 married couples received phaseouts of $110,000 and all other files were $75,000.
Starting in 2018-2025, the TCJA will issue a $500 nonrefundable credit for qualifying dependents other than qualifying children.
These provisions all expire after 2025.
State and Local Tax Deduction
Under the new law for 2018–2025, taxpayers can claim a deduction of no more than $10,000 for state and local property taxes and either income or sales taxes combined. The TCJA forbids taxpayers from claiming an itemized deduction in 2017 for prepayment of state or local income tax for a future year to avoid the dollar limitation applicable for future tax years.
Mortgage Interest Deduction
The TCJA limits the itemized deduction for home mortgage interest by allowing a taxpayer to deduct interest only on mortgage debt of up to $750,000. The limit stays at $1 million for mortgage debt earned prior to December 15, 2017, which helps to reduce the taxpayers affected.
The new law also suspends the deduction for interest on home equity debt: For 2018–2025, taxpayers can’t claim deductions for such interest at all, regardless of when the debt was incurred or how it’s used.
Medical Expense Deduction
This itemized deduction lives on and is, in fact, enhanced for two years. The threshold for deducting such unreimbursed expenses is reduced from 10% of adjusted gross income (AGI) to 7.5% for all taxpayers for both regular and alternative minimum tax (AMT) purposes in 2017 and 2018. You may want to bunch eligible expenses into 2018 to the extent possible to maximize your deduction.
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. If you’re an employee and work from home, this includes the home office deduction.
The deduction for work-related, as well as gross income and wages for moving reimbursements, moving expenses is suspended for 2018–2025, except for active-duty members of the Armed Forces along with their spouses or dependents who move due to a military order.
Personal Casualty & Theft Deduction
The TCJA has suspended this deduction with the exception of if the loss was due to an event declared a disaster by the President.
The limit on the deduction for cash donations to public charities has been increased to 60% of adjusted gross income. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated. Also keep in mind that you must itemize to benefit from the charitable contributions deduction.
After 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. Because the recipient spouse woul typically pay income taxes at a rate lower than the paying spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent
529 plan distributions that are used to pay certain education expenses are generally tax-free. The qualified education expenses have been extended to include postsecondary school and primary and secondary school expenses.
Notably, the TCJA leaves untouched many breaks that would have been reduced or eliminated under the original House or Senate bills, such as the:
- Principal residence gain exclusion,
- Exclusion for employer-provided adoption assistance,
- Lifetime Learning credit,
- Deduction for student loan interest, and
- Deduction for graduate student tuition waivers.
Also on the plus side, the law suspends the overall limitation on itemized deductions for 2018–2025.
AMT & Estate Tax
The House lost the battle over repeal of the AMT and the estate tax — both continue to apply. But the TCJA makes them applicable to fewer taxpayers than in the past.
Beginning in 2018, the new law increases both the AMT exemption amount (to $109,400 for married couples, $70,300 for singles and heads of households, and $54,700 for separate filers) and the AMT exemption phaseout thresholds (to $1 million for married couples and $500,000 for all other taxpayers other than estates and trusts). These amounts will be adjusted for inflation until the provision expires after 2025.
Similarly, the TCJA doubles the estate tax exemption to $10 million for 2018–2025. The exemption is adjusted for inflation and is expected to be $11.2 million for 2018. But because the exemption doubling is only temporary, taxpayers with assets in the $5 million to $11 million range (twice that for married couples) will still have to keep estate taxes in mind in their planning.
Taxpayers who convert a pretax traditional IRA into a post tax Roth IRA lose their ability to later “recharacterize” (that is, reverse) the conversion. Those who wish to recharacterize a 2017 Roth conversion must do so by December 31, 2017.
Recharacterization is still an option for other contributions, though. For example, an individual can make a contribution to a Roth IRA and subsequently recharacterize it as a contribution to a traditional IRA (before the applicable deadline).
As with any piece of massive legislation, many questions about implementation and impact linger unanswered. I will keep you apprised as more information becomes clear about how the TCJA will affect individual taxpayers.