12/26/2017
Tax Reform Update: The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Bill (H.R. 1) is the first significant tax reform effort undertaken by Congress in more than 30 years. The bill was passed by both the House and the Senate and signed into law by President Trump.
Individuals
Tax Brackets. The number of tax brackets remains at seven; however, the tax rates and income covered have changed.
For individuals, the following tax rates apply:
10% up to $9,525
12% up to $38,700
22% up to $82,500
24% up to $157,500
32% up to $200,000
35% up to $500,000
37% over $500,000
For married couples filing jointly, the following rates apply:
10% up to $19,050
12% up to $77,400
22% up to $165,000
24% up to $315,000
32% up to $400,000
35% up to $600,000
37% over $600,000
Standard Deduction. The standard deduction increases to from $6,350 (2017) to $12,000 for individuals, from $9,300 (2017) to $18,000 for heads of household and from $12,700 (2017) to $24,000 for married couples.
Personal Exemption. The deduction for personal exemptions is repealed through 2025.
Child Tax Credit. The Child Tax Credit increases to $2,000 from the current $1,000. An additional $500 credit is provided for each non-child dependent. Also, Social Security numbers for children are required before claiming the enhanced credit.
Alternative Minimum Tax. The AMT remains but exemption amount increase to $70,300 for individuals and $109,400 for married filing jointly, affecting fewer taxpayers.
Capital Gains and Dividends. The maximum tax rate remains at 23.8% (20% plus the 3.8% Medicare tax for taxpayers with income above $200,000 or $250,000 married filing jointly). The 20% capital gains income threshold increases to $425,800 for other individuals ($479,000 for married taxpayers filing jointly).
Estate Tax. The exemption (currently $5.5 million) immediately doubles to $11.2 million in 2018 and remains at this level for the next six years, after which time the estate tax is is eliminated completely (tax year 2026 and beyond).
Education-Related Tax Credits and Deductions. 529 Savings Plans are expanded to allow some funds (up to $10,000 for certain expenses) to be used for K-12 education. Rollovers to Achieving a Better Life Experience (ABLE) Sec. 529A accounts will be allowed as well. The student loan interest deduction remains.
Mortgage Interest Deduction. Remains but with a few changes such as allowing interest deduction for up to $750,000 (currently $1 million) in mortgage principal on new homes. Existing mortgages are grandfathered in. Homes entered into contract before December 15, 2017, and closed on by April 1, 2018, are able to use the prior limit of $1 million.
Home-equity loans. The home-equity loan interest deduction is repealed through 2025.
State and Local Income Tax Deduction. Preserved. Deduction allowed for up to $10,000 a year in state and local income or property taxes.
Note:Taxpayers who prepay 2018 state income taxes, a common tax planning strategy, cannot take the prepaid 2018 amount as a deduction on their 2017 tax returns.
Charitable Contributions. Deductions for charitable donations remain; however, for charitable contributions of cash to public charities the percentage of income limit increases to 60%.
Medical Expense Deductions. The Medical expense deduction (currently 10% of AGI) is temporarily lowered to 7.5% of income for tax years 2017 and 2018.
Miscellaneous Deductions. Many are repealed through 2025 including those relating to tax preparation, alimony payments (after December 31, 2018), and moving expenses with the exception of the moving expense reimbursement for members of the Armed Forces on active duty who move because of a military order.
Adoption Tax Credit. Remains.
Electric Vehicles. The $7,500 tax credit (Sec. 30D) for the purchase of electric vehicles remains.
Individual Healthcare Mandate. Penalty is eliminated for tax years starting in 2018.
