New Tax Act
The Tax Cuts and Jobs Act (TCJA) of 2017 constitutes the most significant revision of the Internal Revenue Code since the Tax Reform Act of 1986. The bill contains many provisions affecting both individuals and businesses. These are 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 following tax brackets and rates will expire and revert to the previous rates beginning in 2026. The new tax brackets are as follows:
Married Filing Joint (based on taxable income)
• 10% from $0 to $19,050
• 12% from $19,050 to $77,400
• 22% from $77,400 to $165,000
• 24% from $165,000 to $315,000
• 32% from $315,000 to $400,000
• 35% from $400,000 to $600,000
• 37% from $600,000 and above
Single (based on taxable income)
• 10% from $0 to $9,525
• 12% from $9,525 to $38,700
• 22% from $38,700 to $82,500
• 24% from $82,500 to $157,500
• 32% from $157,500 to $200,000
• 35% from $200,000 to $500,000
• 37% from $500,000 and above
Capital Gain/Qualified Dividend Rates – Set as Statutory Dollar Amounts – The TCJA generally retains the present law 0%, 15%, and 20% tax rates on net long-term capital gains and qualified dividends. However, these rates are no longer tied to ordinary income tax brackets. For tax years after 12/31/17, the breakpoints at which the preferential tax rates begin to apply are set by a statutory dollar amount and is indexed for inflation. For 2018, the 15% breakpoint is $77,200 for MJF and $38,600 for single taxpayers. In addition, the 20% breakpoint is $479,000 for MJF and $425,800 for single taxpayers.
Increased Standard Deduction - this provision will expire and revert to the previous system in 2026. The standard deduction for individuals is increased as follows:
• Single/Married Filing Separately - $12,000
• Head of Household - $18,000
• Married Filing Joint - $24,000
Personal & Dependency Exemptions – this provision is suspended for tax years beginning after 12/31/17.
Affordable Care Act (ACA) Individual Mandate – For tax years after 12/31/18, the individual mandate penalty (shared responsibility payment) under the ACA is repealed.
Roth Conversion Re-characterizations - Under the TCJA, the re-conversion of a Roth IRA back into a traditional IRA is no longer permitted. The IRS has clarified that re-conversions back into a traditional IRA will be permitted through October 15, 2018. A Roth IRA conversion made on or after January 1, 2018 cannot be re-characterized.
Section 529 Plans – The TCJA allows distributions from Section 529 plans of up to $10,000 per year for an account beneficiary’s tuition at a public, private, or religious elementary or secondary school.
Kiddie Tax Changes – Earned income is taxed based on rates for single taxpayers and unearned income above the annual threshold will be taxed at the same large tax rates as applied to trusts and estates. As a result, the child’s tax is unaffected by the parent’s tax situation or the unearned income of siblings.
Alternative Minimum Tax (AMT) – The AMT has been retained for individuals by the new law, but the exemptions have been increased. For tax years after 12/31/17, the TCJA increases the exemption amounts to $109,400 (MFJ) and $70,300 (single). The exemption is phased out for taxpayers with alternative minimum taxable income (AMTI) over $1M for joint filers and over $500,000 for all others.
Alimony Payments - For any divorce or separation agreement executed after 12/31/18, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.
Moving Expenses – For tax years after 12/31/17, 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.
Student Loan Discharge - For discharges of indebtedness after 12/31/17, certain student loans that are discharged on account of death or total and permanent disability of the student are excluded from gross income.
Itemized Deductions – Medical Expenses - For tax years after 12/31/16 and before 1/1/19, the threshold on medical expense deductions is reduced to 7.5% of adjusted gross income (AGI) for all taxpayers.
Itemized Deductions – State and Local Taxes (SALT) – For tax years after 12/31/17, the TCJA limits the deduction to $10,000 for the aggregate of state and local income taxes, property taxes or sales taxes (if elected).
Itemized Deductions – Mortgage Interest – For tax years after 12/31/17, the deduction for home mortgage interest is limited to interest on up to $750,000 (previously $1M) of acquisition indebtedness and the deduction for interest on home equity indebtedness is suspended (previously $100k). The new lower limit doesn't apply to acquisition indebtedness incurred before Dec. 15, 2017.
Itemized Deductions – Personal Casualty Losses – For tax years after 12/31/17, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a federally-declared disaster.
Itemized Deductions – Charitable Contributions – For contributions made after 12/31/17, the 50% limitation for an individual's 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.
Miscellaneous Itemized Deductions – For tax years after 12/31/17, the deduction for miscellaneous itemized deductions that are subject to the 2%-of-AGI floor is suspended. This generally includes: tax preparation fees, investment expenses, unions dues and unreimbursed employee business expenses.
Itemized Deduction Limitation – For tax years after 12/31/17, the “Pease limitation” on overall itemized deductions for high-income earners (also referred to as the “3%/80% rule) is suspended.
New Deduction for Qualified Business Income - For tax years after 12/31/17, the TCJA adds a new deduction for noncorporate taxpayers for qualified business income (QBI) and is referred to as the “pass-through deduction.” The deduction reduces taxable income, rather than adjusted gross income (AGI), but is available to taxpayers who take the standard deduction. The deduction is generally 20% of a taxpayer's qualified business income (QBI) from a partnership, S corporation, or sole proprietorship.
Child Tax Credit - For tax years after 12/31/17, the child tax credit is increased to $2,000. The income levels at which the credit phases out are increased to $400,000 (MFJ) or $200,000 (single). The amount of the credit that is refundable is increased to $1,400 per qualifying child and is indexed for inflation. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.