On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”) that was passed by Congress on December 20, 2017. The Act will take effect on January 1, 2018 and will make important changes to existing tax laws and impact you.
INCOME, ESTATE, GIFT, AND GENERATION-SKIPPING TAXATION:
Estate, Gift, and Generation-Skipping Tax Exemption. The Act doubles the individual federal estate, gift, and generation-skipping tax exemptions from $5,000,000, adjusted for inflation ($5.49 million in 2017) to $10,000,000, adjusted for inflation ($11.0 million in 2017). The Act also maintains the basis step-up of inherited assets to their fair market value at death.
Income Taxation of Individuals. The Act maintains seven (7) income tax brackets but lowers the income tax rates to 10%, 12%, 22%, 24%, 32%, 35% and 37% from 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The Act also decreases the income threshold to $600,000 for married taxpayers filing jointly and $500,000 for single filers. The new individual tax rates will sunset on December 31, 2025. For comparative purposes, under 2017 federal income tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739. While under the new 2018 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.
Alternative Minimum Tax. The Act also increases the individual exclusions and phase-out thresholds for the individual alternative minimum tax to $1,000,000 for couples and $500,000 for single taxpayers but does not eliminate the alternative minimum tax.
Income Taxation of Trusts and Estates. Income in excess of $12,500 will be subject to the 37% income tax bracket.
DEDUCTIONS:
Standard Deduction: The standard deduction for single and married taxpayers filing separately is increased from $6,350 to $12,000. A surviving spouse and married taxpayers filing jointly will receive a $24,000 deduction (increased from $12,700). The standard deduction for heads of household is increased to $18,000 from $9,350. The Act leaves intact the additional standard deduction for filers who are 65 and over or blind which allows a married couple to claim an additional $2,600 and single taxpayer an additional $1,600 when they file their 2018 taxes. It is anticipated to result in more taxpayers utilizing their standard deduction instead of itemized deductions.
Personal Exemption: The $4,050 per person exemption is eliminated.
Child Tax Credit: The credit is increased from $1,000 to $2,000 per child with modified adjusted gross income phase outs at $400,000 for married taxpayers filing jointly; and $200,000 for single, head of household and married filing separately taxpayers. However, only up to $1,400 is refundable for certain filers. A new $500 nonrefundable credit is also available for dependents who do not qualify for the child tax credit. Taxpayers can claim this credit for children who are too old for the child tax credit, as well as for non-child dependents.
Medical Expense Deduction: The deductible limit is decreased from 10% to 7.5% of adjusted gross income for 2017 and 2018.
State and Local Tax Deduction. State income, property, and sales taxes will be deductible for individual taxpayers only up to an aggregate cap of $10,000. This cap will sunset on December 31, 2025. The Act prevents a deduction for the prepayment of any state income taxes related to a year beginning after 2017.
Mortgage Interest and Home Equity Loans. The mortgage interest deduction for home loans entered into after December 31, 2017, is decreased from $1,000,000 to $750,000. Mortgage loans entered into prior to January 1, 2018 will not be impacted. While taxpayers will continue to be able to deduct interest on second homes the interest expense deduction is eliminated for home equity loans beginning after December 31, 2017.
Charitable Contribution Deduction. The current deduction limitation of 50% of the individual’s adjusted gross income for contributions to public charities is increased to 60%. Existing limits continue to apply to contributions of marketable securities or other property to public charities and to all contributions to private foundations.
Alimony Deduction. Under the Act, with regard to divorce or separation agreements executed on or after January 1, 2019, alimony payments will no longer be deductible by the payor or income to the recipient.
Moving Expense Deduction. The Act eliminates the moving expense deduction, except for the expenses of active members of the military who relocate pursuant to military orders. Under prior tax law a taxpayer could utilize the deduction when moving due to new employment that is located at least 50 miles further than the taxpayer’s previous place of employment from the taxpayer’s residence.
Other Deductions. The following deductions remain status quo under the Act: Educator Expense Deduction which allows K-12 educators to deduct up to $250 per year for unreimbursed classroom supplies; Student Loan Interest paid can be deducted up to $2,500 by qualifying taxpayers; Health Savings Account (HSA) deduction; IRA deduction; and deductions for self-employed taxpayers (SE tax, SE health insurance, SE qualified retirement plan contributions).
PENALTIES:
The Act eliminates the Affordable Care Act’s mandate that people have health insurance or pay a penalty.
