Updated announcement as of December 20, 2017: Tax Cuts and Jobs Act ("The Act") - Individual

On December 20, the House approved H.R. 1, the "Tax Cuts and Jobs Act," the sweeping tax reform measure, by a vote of 224 to 201. The Senate had passed the measure, as revised to address some procedural complications, the night before, and the bill will soon make its way to President Trump for his expected signature. This article 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.

Changes to Tax Rates & Brackets

The Act would maintain seven brackets with the new rates and levels as follows:   

Married filing Joint Brackets:

Rate Taxable Income

10%

Up to $19,050

12%

$19,051 - $77,400

22%

$77,401 - $165,000

24%

$165,001 - $315,000

32%

$315,001 - $400,000

35%

$400,001 - $600,000

37%

Over $600,000

 

Single Brackets:

Rate Taxable Income

10%

Up to $9,525

12%

$9,526 - $38,700

22%

$38,701 - $82,500

24%

$82,501 - $157,500

32%

$157,501 - $200,000

35%

$200,001 - $500,000

37%

Over $500,000


Basic standard deduction increased.
The Act would increase the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers.

Increased Standard Deduction & Elimination of Personal Exemptions

The Act would not make any changes to the current law in regards to the additional standard deduction for the elderly and blind.

Personal exemptions suspended. The Act would effectively repeal the deduction for personal exemptions (which under current law is scheduled to be $4,150 for 2018, subject to a phase out for higher earners) by reducing the exemption amount to zero.

Repeal of Obamacare Individual Mandate

Individual mandate. The Act would reduce the amount of the individual shared responsibility payment, i.e. the individual mandate under Obamacare, to zero, effective for health coverage status for months beginning after Dec. 31, 2018.

Enhanced Child Tax Credit

Increased child tax credit. 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.

Streamlined Education Incentives

529 account funding. The Act would allow up to $10,000 per tax year of 529 account funds to be used for tuition at an elementary or secondary public, private, or religious school.

Student loan discharge-death or disability. Under the Act, certain student loans that are discharged on account of death or total and permanent disability of the student would be excluded from gross income, effective for loan discharges after Dec. 31, 2017.

State and Local Tax Deduction Limited

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, subject to the exception described below, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity for the production of income. State and local income, war profits, and excess profits are not allowable as a deduction.

Limited deduction for individuals.  However, 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 for the production of income; 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.

Prepayment provision. For tax years beginning after Dec. 31, 2016, in the case of an amount paid in a tax year beginning before Jan. 1, 2018 with respect to a State or local income tax imposed for a tax year beginning after Dec. 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is so imposed for purposes of applying the above limits. In other words, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can't claim an itemized deduction in 2017 for that prepaid income tax.

Medical Expense Deduction

Deduction for medical expenses. The Act would reduce the floor on medical expense deductions to 7.5% (down from 10% under current law) for all taxpayers for tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019. The Act would also make corresponding changes such that the adjustment for AMT purposes to the medical expense deduction doesn't apply to tax years during that time period.

Mortgage & Home Equity Indebtedness Interest Deduction Limitation

New law. 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.

Charitable Contribution Deduction

The Act would increase the 50% limitation for cash contributions to public charities and certain private foundations to 60%. Contributions exceeding the 60% limitation would generally be allowed to be carried forward and deducted for up to five years, subject to the later year's ceiling.

For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.

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.

Other Deductions and Exclusions

Suspended provisions. The Act would suspend:

. . . the deduction for personal casualty and theft losses, except for personal casualty loss incurred in a Presidentially-declared disaster;

. . . all miscellaneous itemized deductions that are subject to the 2% floor under current law;

. . . the overall limitation (the "Pease" limitation) on itemized deductions;

. . . the exclusion for qualified moving expense reimbursements; and

. . . the deduction for moving expenses, except for certain exclusions and/or reimbursements for members of the Armed Forces.

Estate and Generation-Skipping Transfer (GST)

The Act would double the base estate and gift tax exemption amount-i.e., the amount of transferred property that is exempt from estate and gift tax-from $5 million (as indexed for inflation; $5.6 million for 2018) to $10 million (which will also be indexed for inflation). Thus, the basic exemption amount would be approximately $11.2 million for individuals and $22.4 million for couples for 2018.

Alternative Minimum Tax

AMT exemption amounts increased. The Act would increase the AMT exemption amounts for individuals as follows:

. . . For joint returns and surviving spouses, from $78,750 under current law as adjusted for inflation ($86,200 for 2018) to $109,400, as adjusted for inflation in tax years beginning after 2018.

. . . For single taxpayers, from $50,600 under current law as adjusted for inflation ($55,400 for 2018) to $70,300, as adjusted for inflation in tax years beginning after 2018.

AMT exemption phase-out increased. Under the Act, the above exemption amounts would be reduced (not below zero) to an amount equal to 25% of the amount by which the alternative taxable income of the taxpayer exceeds the phase-out amounts, increased as follows:

. . . For joint returns and surviving spouses, from $150,000 under current law as adjusted for inflation ($164,100 for 2018) to $1,000,000, as adjusted for inflation in tax years beginning after 2018.

. . . For single taxpayers, from $112,500 under current law as adjusted for inflation ($123,100 for 2018) to $500,000, as adjusted for inflation in tax years beginning after 2018.

New Maximum Rate on Business Income of Individuals

New 20% deduction. The Act would generally allow a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship to deduct the lesser of: (i) the "combined qualified business income amount" of the taxpayer, or (ii) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year less net capital gain.

There are significant limitations on what qualifies as QBI and additional limitations based on the W-2- wages attributable to QBI.

Thresholds and exclusions. The deduction would not apply to specified service businesses (e.g., law, health, finance but excluding engineering and architecture), except in the case of a taxpayer whose taxable income does not exceed $315,000 for married individuals filing jointly ($157,500 for other individuals), both indexed for inflation after 2018. The benefit of the deduction for service businesses would be phased out over the next $100,000 of taxable income for joint filers ($50,000 for other individuals).

As always, please feel free to contact us with any specific questions.

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