President Donald Trump signed The Tax Cuts and Jobs Act (TCJA) bill on December 22, 2017. This bill contains sweeping tax changes which primarily take effect beginning with the 2018 tax year.
These tax law changes are going to have a significant effect on individual taxpayers. However, the bill also made numerous significant changes to business tax laws. These changes will also impact individuals since they are the owners, employees, and customers of the businesses affected by the new tax laws.
Many of the new provisions for individual taxpayers will expire after the 2025 tax year. Unless, of course, they are extended by Congress before then.
Tax rates and brackets
The tax rates for individuals under the old law were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Under the new law, the tax rates for individuals are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As of now, these rates will be in effect from 2018 to 2025.
Below is a comparison of the tax rates and brackets for 2017 versus 2018. In addition to reductions in the tax rates, you will notice changes in the tax brackets as well. The tax bracket thresholds change each year based on an inflation index.
Dividends and Capital Gains
Short term capital gains (held one year or less) are still taxed at ordinary income rates. Long term capital gains (holding period of more than one year) tax rates remain at 0%, 15%, or 20%, depending on your taxable income.
However, previously, the different long term rates coincided with specific ordinary income tax brackets. Now there are specific taxable income ranges set by the new law which coincide with the old tax brackets. These ranges will determine which long term capital gains rate will apply to you.
One of the major changes for individual taxpayers is the increase in the standard deduction. This increase will have the effect of simplifying tax preparation for many. It will significantly reduce the number of individual taxpayers who itemize their tax deductions.
Then again, those who already had itemized deductions close to the new standard deduction amount will not see much benefit from this new provision.
The standard deduction is increased to $24,000 for joint filers. It was $12,700 for the 2017 tax year. For single filers, it increased to $12,000 from $6,350. Head-of-household filers will see an increase to $18,000 from $9,350.
The additional standard deductions for age (those 65 or older) and the blind are still allowed.
Personal and Dependency Exemptions
Deductions for personal and dependency exemptions ($4,050 each in 2017) will no longer be allowed under the new law. This provision is also due to expire after tax year 2025.
These deductions represented a significant tax benefit for many taxpayers which will no longer be available. A family of four, for example, was able to deduct $16,200 in 2017.
For many taxpayers, this will more than offset any tax benefit received from the standard deduction increase. However, the government did provide an additional tax benefit for those who qualify by increasing the child tax credit (see below).
The deduction for moving expenses is eliminated effective for the 2018 tax year until tax year 2025. This change does not apply to moving expenses of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station.
Those who divorce or separate after 2018 will be subject to new alimony tax rules.
For such taxpayers, alimony will no longer be included as income for the recipient. Further, it will not be an allowable tax deduction for the payer.
This is another area of individual taxation which experienced significant changes. With curbs in deductions for real property taxes and mortgage interest, there is uncertainty what impact the new law will have on the real estate market.
Others also fear that charities may be negatively affected by the new law. The concern here is that the higher standard deduction will reduce the likelihood of a tax benefit from a charitable contribution for many taxpayers. The end result may be a reduction in donations to charities.
Under the old law, taxpayers were allowed to deduct their state and local income taxes (or sales taxes if higher), as well as their property taxes. The new law, however, now limits the total deduction for all state and local income (or sales) and property taxes combined to $10,000. Also, foreign real property taxes can no longer be deducted.
Granted some higher income taxpayers didn’t receive a benefit from higher tax payments anyway. The reason being that they represent an addback for alternative minimum tax (AMT) purposes. However, there will still be taxpayers who were not in the AMT and who benefited more from the old law in this regard.
For home acquisition indebtedness incurred on or before December 15, 2017, there is no change to the $1,000,000 limit on which you can deduct interest. The old rules apply even if you subsequently refinance such a loan, to the extent the new loan is not greater than the amount refinanced.
However, for new loans incurred after December 15, 2017 and before 2026, you can only deduct interest on up to $750,000 of acquisition indebtedness. The new limitation is still relatively high, and will not affect the majority of taxpayers.
If a written binding contract was entered into by a taxpayer before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, the old rules will apply if the home is purchased before April 1, 2018.
The interest deduction on up to $100,000 of home equity debt will no longer be allowed under the new law. This applies to both pre and post 2018 home equity indebtedness.
The threshold has been reduced back down to 7.5% (from 10%) for tax years 2017 and 2018. However, it will still be unlikely that most individuals will have unreimbursed qualifying medical expenses that will exceed 7.5% of their adjusted gross income.
And if they do, it is only the excess over the threshold that is deductible. Not to mention that there will still be no tax benefit if the total deductible itemized deductions of the taxpayer do not exceed the standard deduction.
As such, if eligible, it pays to set up and contribute to a Health Savings Account (HSA) so that you can effectively deduct unreimbursed qualifying medical expenses.
Miscellaneous Itemized Deductions
Those deductions subject to the 2% floor under the old law are no longer deductible under the new legislation. This includes expenses such as union dues, tax preparation fees, safe deposit box rental, and unreimbursed employee business expenses. Granted, besides the fact that these expenses were an addback for AMT purposes, it was relatively rare for many taxpayers to exceed the 2% of AGI threshold. However, some did benefit.
There are some ways taxpayers can minimize the impact of this change. For unreimbursed employee business expenses, try to make an arrangement with your employer to reimburse you under an accountable plan for any employment related expenses to the extent possible.
Alternatively, if you are paid via a W-2 as a statutory employee or as a 1099 independent contractor, you can still deduct unreimbursed expenses on Schedule C.
If you are a partner in a partnership, you can also still deduct unreimbursed partnership expenses (UPE) on Schedule E.
Personal Casualty and Theft Losses
Deductions for personal casualty and theft losses are not allowed under the new law. An exception is personal casualty losses attributable to a Federally declared disaster. This change applies until tax year 2025.
Child Tax Credit
Under the old law, the child tax credit was $1,000 per qualifying child and was refundable. The new law increases the credit to $2,000 per child, and up to $1,400 is refundable.
A startling change with regard to the child tax credit is the adjusted gross income thresholds at which the credit gets phased out.
For joint filers, this threshold increased from $110,000 in 2017 to $400,000 starting in 2018. For single and head-of-household taxpayers, it increased from $75,000 to $200,000. It’s not clear why a family making over $350,000, for example, should benefit from the child tax credit. But that is how the new law is written.
The new law also provides an additional “family tax credit” of $500 for qualifying dependents such as parents or older children, who are not otherwise “qualifying children”. This additional part of the credit is not refundable.
These changes are also effective until tax year 2025.
Alternative Minimum Tax
Under the old law (2017), the AMT exemption amount was $84,500 for joint filers, and started to get phased out at $160,900 of income. For single filers, the exemption was $54,300 and was phased out starting at $120,700 of income.
The new tax law increases the AMT exemption amount to an inflation adjusted $109,400 for joint filers, and to $70,300 for single and other taxpayers. It will phase out at $1 million and $500,000 of income, respectively.
These amounts will be indexed for inflation. The changes will be effective until tax year 2025.
Affordable Care Act Penalty
The new tax law eliminates the “individual mandate” penalty effective for tax year 2019. So you will not pay a penalty if you are not covered by health insurance as was previously required.
However, for higher income individuals, other ACA provisions such as the net investment income tax (NIIT) and the additional Medicare tax remain part of the tax law.
Inflation Index Adjustments
The IRS will begin using the “chained” Consumer Price Index (CPI) instead of the traditional CPI under the new law. This may result in more accurate albeit slower inflation adjustments.
Areas affected may be tax brackets, the standard deduction, AMT exemptions, and other credits and thresholds.
Recharacterization of Roth IRA Contributions
Under the new law, taxpayers will no longer be able to recharacterize or “undo” Roth IRA conversions back to traditional IRAs.
Federal Estate Tax
The base estate and gift tax exclusion (indexed for inflation) is doubled under the new law. The increase applies for tax years 2018 to 2025.
Under the new law, individuals can now exclude up to $11.2 million from estate and gift taxes. So a married couple can exclude a combined $22.4 million. These numbers are indexed for inflation each year.
Section 529 plans can now be used to also pay for up to $10,000 per year in K-12 tuition. Under the old law, funds from such plans could only be used to pay for college. This will help families who send their children to private elementary, middle, and high schools.
The new law also allows taxpayers to roll over a Coverdell Educational Savings Account (ESA) into a Section 529 plan without tax ramifications.
The extent to which the new tax law will affect each taxpayer will obviously vary. Each individual’s income level and other personal circumstances will be different. However, it seems like the vast majority of individuals who paid income taxes under the old law will pay less under the new one.
Since most of these new provisions expire after the 2025 tax year, it remains to be seen which ones, if any, will be extended by Congress in future years.