Individual Tax Update: Tax Cuts and Jobs Act (H.R. 1)

Individual Tax Update: Tax Cuts and Jobs Act (H.R. 1)

On December 20, Congress approved the “Tax Cuts and Jobs Act” (H.R. 1), and the most sweeping U.S. tax code change in decades is on its way to the White House, where President Trump is expected to sign it into law. Its effects will be far-reaching, impacting virtually every individual and business taxpayer.

The tax team at GellerRagans has been closely following the progress of this historic legislation, and we stand ready to advise and assist as you plan for the future. For individual taxpayers, here are some highlights of the coming changes. Business tax changes will be addressed in a subsequent newsletter. Unless otherwise noted, all provisions apply to tax years 2018-2025.

We hope this information will be both clear and helpful. Please don’t hesitate to contact us if you have concerns not addressed below, or if you desire more personalized assistance.

Tax Rates: Individual taxable income subject to seven tax rates (instead of the previous six) – 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

“Kiddie Tax” (income tax for children): Child’s earned income taxed at the single rate; child’s unearned income taxed according to trust/estate bracket. Tax rate is 10% up to $9,525 of taxable income and $2,550 of unearned income but varies thereafter.

Capital Gains Rates: Remain at 0%, 15%, and 20%, but the income levels at which the rate changes have been increased (15% breakpoint is $77,200 for MFJ and $38,600 for unmarried, 20% breakpoint is $479,000 for MFJ and $425,800 for unmarried). The Net Investment Income Tax (NIIT) of 3.8% is still applicable to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

Standard Deduction: Increased to $24,000 for MFJ, $18,000 for head of household, $12,000 for all others. Additional deduction for elderly and blind taxpayers not affected by the Act.

Personal Exemption: Repealed (through 2025). Wage withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.

Pass-through Income Deduction: Individuals are eligible to deduct 20% of qualified business income from a partnership, S-Corporation, or sole proprietorship, subject to various limitations. Certain businesses are excluded from this provision, including the fields of accounting, healthcare, law, consulting, athletics, financial or brokerage services, or others which are dependent upon the skill or reputation of one or more employees.

Alimony: For any divorce or separation agreement signed after 12/31/18, alimony and separate maintenance payments are not deductible by the payer spouse and not included in the recipient spouse’s income.

Child Tax Credit: Increased to $2,000 per qualified child (under 17 at year-end), with maximum refundable $1,400. New non-refundable $500 credit for qualifying dependents other than children. Subject to certain income level phase-outs.

Medical Expenses: Still includible with itemized deductions, only in excess of 7.5% of adjusted gross income (AGI). Effective for tax years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019.

Affordable Care Act (Obamacare) Individual Mandate: Permanently repealed after 2018, and shared responsibility penalties will no longer be imposed after December 31, 2018. The penalty for lack of coverage is still applicable for tax year 2017.

Mortgage Interest: Still includible with itemized deductions, subject to new limitations. For existing debt incurred before 12/15/17, indebtedness limitation remains at $1 million. For home acquisition debt incurred after 12/15/17, limitation lowered to $750,000. Home equity loan interest (HELOC) is no longer deductible. An exception exists for taxpayers who contracted before 12/15/17 to close on the purchase of a principal residence before 1/1/18, and they will be allowed the prior $1 million limit (purchase must be completed before 4/1/18).

State and Local Taxes: Still includible with itemized deductions, up to the aggregate of $10,000 for state/local property taxes plus state/local income (or sales) taxes paid or accrued in the tax year.

Charitable Contributions: Still includible with itemized deductions, subject to limitations. The limit on cash gifts to public charities and certain private foundations was increased to 60% of income instead of 50%. Payments made for college athletic event seating rights are not deductible.

Miscellaneous Itemized Deductions: No longer deductible (items such as unreimbursed employee expenses, tax preparation fees, brokerage fees, safe deposit box fees, etc.).

Education Provisions: Section 529 plans can be used for tuition at an elementary or secondary school, up to $10,000 per tax year (per student, not per account). Proposed changes related to student interest deductions, the American Opportunity Tax Credit, and the Lifetime Learning Credit were not included in the final Act.

Casualty Losses: No longer deductible unless attributed to a presidentially declared disaster area.

Moving Expenses: No longer deductible, except for members of the armed forces on active duty who move pursuant to military order and incident to a permanent change of station. Moving expense reimbursements are no longer excluded from gross income, with the same exception.

Alternative Minimum Tax (AMT): Tax has been retained, but the income exemption has been increased – now $109,400 for MFJ ($54,700 for MFS) and $70,300 for all other taxpayers. Phase-out thresholds were also increased to $1 million for MFJ and $500,000 for all others.

IRA Recharacterizations: Taxpayers can no longer reverse their decision to convert a traditional pretax IRA to a post- tax Roth IRA (typically referred to as “recharacterization”).

Estate and Gift Taxes: Tax has been retained, but the lifetime exemption has been doubled (expected to be approximately $11.2 million in 2018, or $22.4 million per married couple).

Net Investment Income Tax: Remains unchanged at 3.8% (subject to limitations on modified AGI).

Additional Medicare Tax: Remains unchanged at 0.9% on combined wages over $200,000 (over $250,000 for MFJ).