Individual Tax Changes In The “Tax Cuts and Jobs Act”

 In Planning, Taxation

On December 22, President Trump signed into law the “Tax Cuts and Jobs Act” , a sweeping tax reform law that will entirely change the tax landscape. This article below by Thomson Reuters Checkpoint describes the Act’s changes that would affect individuals, including the new rates and brackets, the increased standard deduction and elimination of personal exemptions, and the repeal of the individual mandate under the Affordable Care Act. Please note that not every provision of this tax act is presented.

New Income Tax Rates & Brackets

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.  The specific application of these rates, and the income brackets at which they apply, is shown below.

         FOR MARRIED INDIVIDUALS FILING JOINT RETURNS
      AND SURVIVING SPOUSES:
If taxable income is:                 The tax is:
--------------------                  -----------
Not over $19,050                      10% of taxable income
Over $19,050 but not                  $1,905 plus 12% of the
  over $77,400                          excess over $19,050
Over $77,400 but not                  $8,907 plus 22% of the
  over $165,000                         excess over $77,400
Over $165,000 but not                 $28,179 plus 24% of the
  over $315,000                         excess over $165,000
Over $315,000 but not                 $64,179 plus 32% of the
  over $400,000                         excess over $315,000
Over $400,000 but not                 $91,379 plus 35% of the
  over $600,000                       excess over $400,000
Over $600,000                         $161,379 plus 37% of the
                                        excess over $600,000
    FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND
         SURVIVING SPOUSES):
If taxable income is:                 The tax is:
--------------------                  ----------
Not over $9,525                       10% of taxable income
Over $9,525 but not                   $952.50 plus 12% of the
  over $38,700                           excess over $9,525
Over $38,700 but not                  $4,453.50 plus 22% of the
  over $82,500                           excess over $38,700
Over $82,500 but not                  $14,089.50 plus 24% of the
  over $157,500                          excess over $82,500
Over $157,500 but not                 $32,089.50 plus 32% of the
  over $200,000                          excess over $157,000
Over $200,000 but not                 $45,689.50 plus 35% of the
  over $500,000                          excess over $200,000
Over $500,000                         $150,689.50 plus 37% of the
                                         excess over $500,000
         FOR HEADS OF HOUSEHOLDS:
If taxable income is:                 The tax is:
--------------------                  -----------
Not over $13,600                      10% of taxable income
Over $13,600 but not                  $1,360 plus 12% of the
  over $51,800                           excess over $13,600
Over $51,800 but not                  $5,944 plus 22% of the
  over $82,500                          excess over $51,800
Over $82,500 but not                  $12,698 plus 24% of the
  over $157,500                          excess over $82,500
Over $157,500 but not                 $30,698 plus 32% of the
  over $200,000                          excess over $157,500
Over $200,000 but not                 $44,298 plus 35% of the
  over $500,000                          excess over $200,000
Over $500,000                         $149,298 plus 37% of the
                                         excess over $500,000
    FOR MARRIEDS FILING SEPARATELY:
If taxable income is:                 The tax is:
--------------------                  ----------
Not over $9,525                       10% of taxable income
Over $9,525 but not                   $952.50 plus 12% of the
  over $38,700                           excess over $9,525
Over $38,700 but not                  $4,453.50 plus 22% of the
  over $82,500                           excess over $38,700
Over $82,500 but not                  $14,089.50 plus 24% of the
  over $157,500                          excess over $82,500
Over $157,500 but not                 $32,089.50 plus 32% of the
  over $200,000                          excess over $157,500
Over $200,000 but not                 $45,689.50 plus 35% of the
  over $300,000                          excess over $200,000
Over $300,000                         $80,689.50 plus 37% of the
                                         excess over $300,000

Standard Deduction Increased

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, 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 beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.

Personal Exemptions Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.

Capital Gains Provisions Conformed

The adjusted net capital gain of a noncorporate taxpayer (e.g., an individual) is taxed at maximum rates of 0%, 15%, or 20%. 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.

Deduction for Personal Casualty & Theft Losses Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster.  However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed the gain.

Gambling Loss Limitation Modified

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.

Child Tax Credit Increased

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period, as outlined below.

Phase-out. 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) (not indexed for inflation).

Non-child dependents. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.

Refundability. The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.

SSN required. No credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child’s SSN.

State and Local Tax Deduction Limited

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business or activity and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted.

Mortgage & Home Equity Indebtedness Interest Deduction Limited

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). For tax years after Dec. 31, 2025, the prior $1 million/$500,000 limitations are restored, and a taxpayer may treat up to these amounts as acquisition indebtedness regardless of when the indebtedness was incurred. The suspension for home equity indebtedness also ends for tax years beginning after Dec. 31, 2025.

Treatment of indebtedness incurred on or before Dec. 15, 2017. The new lower limit doesn’t apply to any acquisition indebtedness incurred before Dec. 15, 2017.

“Binding contract” exception. A taxpayer who has entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017.

Refinancing. The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, so long as the indebtedness resulting from the refinancing doesn’t exceed the amount of the refinanced indebtedness.

Medical Expense Deduction Threshold Temporarily Reduced

For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5% for all taxpayers.

In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019.

Charitable Contribution Deduction Limitation Increased

For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling.

Alimony Deduction by Payor/Inclusion by Payee Suspended

For any divorce or separation agreement executed after Dec. 31, 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. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.

Miscellaneous Itemized Deductions Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended.

Moving Expenses Deduction Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.

AMT Retained, with Higher Exemption Amounts

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:

  • . . . For joint returns and surviving spouses, $109,400.
  • . . . For single taxpayers, $70,300.
  • . . . For marrieds filing separately, $54,700.

For trusts and estates, the pre-inflation adjustment exemption amount of $22,500 and phase-out amount of $75,000 remain unchanged. All of these amounts will be adjusted for inflation after 2018.

Repeal of Obamacare Individual Mandate

For months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. This repeal is permanent. The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.

Expanded Use of 529 Account Funds

Under pre-Act law, funds in a 529 college savings account could only be used for qualified higher education expenses. 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 Amount

A gift tax is imposed on certain lifetime transfers , and an estate tax is imposed on certain transfers at death.

Under pre-Act 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).

New law. 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 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).

 

Source: Thomson Reuters Checkpoint, 2017 Tax Reform: Checkpoint Special Study on Individual Tax Changes in the “Tax Cuts and Jobs Act”,

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