The Tax Cuts and Jobs Act: Impact on Individual Taxes

The Tax Cuts and Jobs Act signed by President Trump on December 22, 2017 is the largest tax overhaul our nation has seen since 1986.  Due to the speed with which this was pushed through Congress most changes, but not all, will go into effect in 2018.  Many of the individual tax provisions are temporary, and after 2025 will revert back to the rules in place in 2017 unless extended, revised, or made permanent.  Listed below are summaries of some of the major individual tax provisions that were changed by The Tax Cuts and Jobs Act.

Tax Rates

Under pre-Act law, the Internal Revenue Code included seven tax rates for individuals filing a tax return: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. For tax years beginning after December 31, 2017 and before January 1, 2026, the Tax Cuts and Jobs Act has instituted seven tax rates of: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Each individual tax bracket has been adjusted for inflation.

Standard Deduction

Under the Tax Cuts and Jobs Act for the tax years beginning after December 31, 2017 and before January 1, 2026, the standard deduction has been increased for each filing status: $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers. These figures will be adjusted for inflation in the tax years beginning after December 31, 2018. The additional standard deduction for the elderly and blind has been increased to include an additional $1,300 deduction for both the taxpayer and spouse who are over the age of 65 and/or blind, or an additional $1,600 deduction in the case of an individual who is not married or a surviving spouse.

Personal Exemptions

Under pre-Act law, taxpayers were allowed to deduct a personal exemption for themselves, their spouse, and each of their dependents from their adjusted gross income.  Under the Tax Cuts and Jobs Act for the tax years beginning after December 31, 2017 and before January 1, 2026, personal exemptions are eliminated.

Kiddie Tax

Under the Tax Cuts and Jobs Act for the tax years beginning after December 31, 2017, a "kiddie tax" will be imposed if the child meets the following criteria:

  • if the child had not reached age 19 by the close of the tax year, or the child was a full-time student under the age of 24, and either of the child's parents was alive,
  • the child's unearned income exceeded $2,100,
  • and the child did not file a joint return.

The taxable income of a child attributable to earned income (i.e. wages, tips, bonuses, etc.) will be taxed under the single individual rate, while the taxable income of a child attributable to unearned income (i.e. interest, dividends, capital gains, etc.) will taxed according to the brackets applicable to trusts and estates. The maximum income tax rate of 37% will be reached once the child has $12,500 of unearned income.  The Act leaves intact the 3.8% net investment surtax above $12,500 of unearned income.

Alimony Income/Deduction

Under the Tax Cuts and Jobs Act, any divorce or separation agreement executed or modified after December 31, 2018 will require the payer to make alimony payments with "post-tax" dollars.  These amounts will no longer be deducted as an adjustment on the payer’s tax return. The spouse receiving alimony payments will no longer have to report the alimony received as income on their return. 

Capital Gain Provisions

The Tax Cuts and Jobs Act generally retains the present-law maximum rates on capital gains and qualified dividends. These brackets have been indexed for inflation for tax years beginning after December 31, 2017.

Alternative Minimum Tax

The Tax Cuts and Jobs Act generally retains the existing laws for AMT, but the exemption amounts and the phase-outs have increased. For the tax years beginning after December 31, 2017 and before January 1, 2026, the exemption amounts for individuals are:

  • $109,400 for joint returns and surviving spouses
  • $70,300 for single taxpayers
  • $54,700 for married filing separately.

A phase-out of the exemption amounts begins with income in excess of $1 million for joint returns and surviving spouses, and income in excess of $500,000 for all other taxpayers.

Obamacare Mandate

Under the pre-Act law, the Affordable Care Act required individuals who were not covered by a health plan providing minimum coverage to pay a "shared responsibility payment" with their federal tax return. Under the Tax Cuts and Jobs Act for months beginning after December 31, 2018, the amount of the individual shared responsibility payments has permanently been reduced to zero. However, the Act leaves intact the 3.8% net investment tax and the 0.9% additional Medicare tax originally enacted by the Affordable Care Act.

Medical Expenses

For January 1, 2017 through December 31, 2018 the medical expense deduction is lowered from 10% to 7.5% for all taxpayers. The 7.5% applies for both AMT & regular tax. The types of allowable medical deductions remain the same.

State and Local Taxes

For tax years beginning after December 31, 2017 and before January 1, 2026 under the Tax Cuts and Jobs Act the aggregate amount of state and local income tax, property taxes, and sales tax are limited to $10,000 for individuals Married Filing Joint (MFJ) and $5,000 for individuals Married Filing Separate (MFS). There is no longer a deduction for foreign real property taxes. 

Mortgage & Home Equity Interest

For tax years beginning after December 31, 2017 and before January 1, 2026 under the Tax Cuts and Jobs Act the maximum amount of home indebtedness has been lowered from $1 million to $750,000 for MFJ ($375,000 for MFS), unless incurred before December 15, 2017.  The $1 million limitation still applies if a taxpayer enters a binding contract before December 15, 2017 to close on the purchase before January 1, 2018, and purchases the house before April 1, 2018.  The home equity interest deduction is suspended.

Charitable Contributions

For contributions made in tax years beginning after December 31, 2017 and before January 1, 2026 the 50% limitation for charitable contributions has been increased to 60%. In the past if a taxpayer paid an amount to a higher education institution and received the right to purchase tickets for seating at that institution's stadium, the taxpayer could deduct 80% of that as a charitable contribution. For these amounts paid in tax years beginning after December 31, 2017 a charitable contribution is no longer allowed.

Personal Casualty Losses

For tax years beginning with January 1, 2018 through December 31, 2025, personal casualty losses are disallowed, unless they are attributable to a federally declared disaster. Non-federal personal casualty losses are permitted to offset personal casualty gains.

Miscellaneous Deductions Subject to 2% Floor

Unreimbursed employee expenses, tax preparation fees, hobby losses, union dues and all other miscellaneous itemized deductions subject to the 2% floor are now disallowed. This is effective for tax years beginning January 1, 2018 through December 31, 2025.

Gambling Losses

For tax years beginning January 1, 2018 through December 31, 2025 the definition of gambling losses has been expanded to include otherwise allowable deductions in addition to losses incurred from wager transactions. Both of these items are now limited to gambling winnings.

Overall Limitation on Itemized Deductions

The AGI threshold limitation on itemized deductions has been suspended. For tax years beginning with January 1, 2018 through December 31, 2025, a taxpayer may claim 100% of the itemized deductions allowed.

Moving Expenses

The above-the-line deduction for qualified moving expenses has been suspended for tax years beginning January 1, 2018 through December 31, 2025. Only active duty members of the armed forces who are moving pursuant to a military order and incident to a permanent change of station.

Child Tax Credit

In general, the child tax credit has been increased to $2,000 per qualifying child for tax years beginning January 1, 2018 through December 31, 2025. The refundable portion has also been increased to up to $1,400 per qualifying child. A non-refundable $500 credit is also available for other qualifying dependents.

Use of 529 Plan Account Funds

Prior to the new act, a distribution qualified as tax-free if the proceeds were used for qualified higher education expenses (i.e. college tuition and room and board).  Under the new act for tax years beginning after December 31, 2017, the definition of qualified higher education expenses has been expanded to include tuition at an elementary or secondary public, private, or religious school.

Recharacterization of IRA Contributions

Under current law, a taxpayer could recharacterize their Roth IRA back to a Traditional IRA if they were in an unfavorable tax position.  With the passage of the new tax reform bill for tax years beginning after December 31, 2017, the ability to unwind a Traditional to Roth conversion through recharacterization has been removed. 

Rollover Periods in Certain Cases

If an employee has a loan against their company's retirement account and the employee terminates employment without repaying the loan, the amount unrepaid becomes a taxable distribution to the account holder if not repaid within 60 days or less.  For tax years beginning after December 31, 2017 under the new act, the 60 day window is extended to the due date of the Federal income tax return (including extensions).  Example:  If an individual terminates employment on June 2018, they would have until October 2019 to repay the amount of any outstanding retirement loan.

Deduction for Qualified Business Income of Pass‐Thru Entities

For tax years beginning after December 31, 2017 and before January 1, 2026, the Tax Cut & Jobs Act eliminated the Domestic Production Activities Deduction (DPAD), replacing it with the Qualified Business Income Deduction (code Sec. 199A). The new deduction is intended to level the playing field to compete with the new, lower corporate rates. Non-corporate taxpayers including trusts and estates which have “Qualified Business Income” from a partnership, S corporation or sole proprietorship are generally allowed a deduction of up to 20% of the flow-thru income.

Estate and Gift Tax Retained with Increased Exemption Amount

For estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the base estate and gift tax exemption amount has been raised from $5 million to $10 million.  The $10 million amount will be indexed for inflation occurring after 2011.  For 2018 the exemption amount is estimated to be $11.2 million ($22.4 million for a married couple).

Electing Small Business Trusts (ESBTs)

Effective January 1, 2018, a nonresident alien may be a potential current beneficiary of an ESBT. Effective January 1, 2018, an ESBT’s charitable contribution deduction will be determined under the same rules applicable to individuals, rather than the rules for trusts. This will allow the percentage limitations and carryforward provisions that apply to individuals to apply to the S Corporation portion of the ESBT.

This broad summary of the new Tax Cuts and Jobs Act should provide you with an awareness of some of the important tax changes facing us.  As expected, these summaries should lead to questions surrounding your personal tax returns. Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.