The recent Tax Cuts and Jobs Act enacted December 22, 2017 by President Trump is tax reform legislation that represents the most significant overhaul of our tax law in more than 30 years and encompasses significant changes to the taxation of individuals.
The provisions are subject to an expiration date to comply with budgetary constraints and unless new law is enacted at time of “sunset”, the provisions will return to 2017 law. The act provides for these provisions to be in effect for tax years beginning after December 31, 2017 and before January 1, 2026. Careful consideration of these provisions should be made for individual tax planning and impacts on significant transactions should be analyzed by your tax advisor.
Key provisions of the act related to individuals’ tax compliance include:
Individual Tax Rates
• The act retains the seven rate brackets for individual income tax but modifies the rates. Under pre-Act law, individuals were subject to seven tax rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
• Under new law, the seven tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
• The act essentially reduces the highest tax rate for individuals from 39.6 percent to 37 percent and eliminates the so-called “marriage penalty” for all but the highest tax bracket.
The Standard Deduction and Personal Exemptions
• The standard deduction is doubled to $24,000 for joint filers and $12,000 for single filers and retains the additional standard deductions for the elderly and blind.
• The act also repeals the deduction for personal exemptions. Thus, personal exemptions of $4,050 generally allowed for the taxpayer, the taxpayer’s spouse, and any dependents under previous law have been eliminated under new law.
Key Modifications or Suspension of Certain Itemized Deductions
• The aggregate deduction for state and local income taxes or sales taxes and state and local property taxes is limited to $10,000 under new law.
• The act decreases the debt limit on mortgage interest on new acquisition debt for a primary or second residence from $1M to $750,000 and eliminates the deduction for interest on home equity debt acquired for personal expenses (including the purchase of a vacation home).
• Charitable contribution provisions include the increase of the AGI limit for donations to public charities and certain private foundations from 50 percent to 60 percent.
• Itemized deductions subject to 2% AGI limitation are suspended under new law.
Other key provisions
• Capital Gains: The act retains the capital gain rates of 0%, 15%, and 20% and its related breaking points as adjusted under the new method for inflation (i.e.: for 2018, the 20% breaking point for married taxpayers is $479,000 for married taxpayers). The act also retains the 3.8% net investment income tax.
• Other Deductions: The act repeals the moving expense deduction with an exception for active duty members of the military. For divorce agreements executed after December 31, 2018, alimony payments will not be deductible by the payer and will be non-taxable to the recipient.
• Child Tax Credit: The act doubles the child tax credit to $2,000 per qualifying child, with $1,400 of this amount refundable. The credit’s AGI limitations for each filing status are significantly increased (i.e.: up from $110,000 to $400,000 for married taxpayers).
• Health Care Tax: Beginning in 2019, the act eliminates the excise tax for individuals who fail to maintain qualifying health insurance as required by the Affordable Care Act (does not expire).
• Inflation Adjustment: The new law also provides for a new measure of inflation. The tax rate brackets, as well as standard deductions and other amounts, will be indexed for inflation using a new method called the chained consumer price index, (C-CPI-U). This method is expected to generally result in smaller annual increases than under the old indexing method (CPI-U).