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Tax Reform Part I - Individuals

Derek Peterson

The Tax Cuts and Jobs Act has been written into law.  While we did not get the simplification of the code that many were hoping for, there are many big changes in store for individuals and businesses in the coming year.  As in years past, the old adage of deferring income until next year and accelerating expenses/deductions into this year generally applies to most situations.

We will be providing a summary of changes to business taxes in another post.  What follows is a summary of some of the most notable changes applicable to individual taxes.  Please note that many provisions that were in the various versions of the tax bills did NOT make it into the final version of the law and are not discussed below – so if you heard about some provision that you thought would affect you that you do not see addressed below, please contact us to see if it was in the final bill.

The good news is that the vast majority of taxpayers will see a reduction in their total tax liability as a result of these changes – more of your income that you get to keep!  However, it should also be noted that the provisions summarized below will largely expire on December 31, 2025 unless Congress extends the provisions or makes them permanent.  As of right now, the law will revert back to what it is right now on 01/01/2026.

Tax Rates

Income Taxes:  We still have seven tax brackets like the current code but the overall rates are lower and the income break points generally higher.  The new rates are:  10%, 12%, 22%, 24%, 32%, 35%, 37%.  You can also get an expanded summary of tax rates here

Capital Gains:  The rates and the method that capital gains are taxed did not change.  The rates remain at 0%, 15%, and 20% depending on your overall taxable income inclusive of capital gains (however, the thresholds at which these rates apply did increase as well).  Once again, you can get an expanded view of the rates here.

AMT (Alternative Minimum Tax) exemptions are increased to $70,300 for taxpayers filing as single (phaseout increased to $500,000) and $109,400 for married filing jointly (phaseout increased to $1,000,000).  This will exempt many more taxpayers from the AMT.

Deductions

Beginning in 2018, the standard deduction will increase significantly.

·         $12,000 for individuals and married filing separate.

·         $18,000 for head of household.

·         $24,000 for married filing jointly.

·         If you are over 65, blind or disabled, you can add an extra $1,300 to you standard deduction and $1,600 for unmarried taxpayers. These amounts did not change.

The effect of this is that many more Americans will not have to itemize deductions on their personal tax returns.

Personal exemptions will no longer be allowed in 2018.  While this is offset somewhat by the larger standard deduction, many larger families will miss the added benefit of multiple exemptions.  The expanded child tax credit also alleviates this deletion – read more below.

Itemized Deductions

The medical expenses deduction floor is reduced to 7.5% of AGI (down from 10%) for the years 2017 and 2018.  In 2019 it goes back up to 10% of AGI.

Taxes:   The total allowable deduction for state and local income or sales taxes as well as property taxes will capped at $10,000 beginning in 2018.  Note that you cannot ‘pre-pay’ your 2018 state and local income and property taxes in 2017 and claim them in 2017.  However, see action below… 

ACTION TO TAKE:  Pay your 2017 property taxes before December 31, 2017 to take a full property tax deduction in 2017.

The mortgage interest deduction will be limited to the interest on new mortgages up to $750,000. (Interest on mortgages incurred before Dec 15, 2017 will be capped on mortgages up to $1,000,000;  additionally, in 2026, the cap will be $1,000,000 again no matter when the mortgage was created.)  Interest on home equity debt will not be allowed starting in 2018.

Beginning in 2018, charitable deductions for cash donations will be allowed for up to 60% of your taxable income (up from 50%).  While not totally clear, the meaning of cash donations may mean that charitable deduction carryforwards may still be limited to 50% of your taxable income.  Charitable deductions made for the purpose of college athletic event seating rights are no longer allowed.  Note:  New provisions make it more important than ever to be sure to get written acknowledgement of all cash donations.

Casualty losses will only be allowed for presidentially declared disasters.  Theft and other casualty losses will no longer be allowed.

Miscellaneous itemized deductions that were subject to the 2% of AGI limitation are now totally gone.  This includes home office deductions, un-reimbursed employee expenses, investment expenses, etc…

ACTION TO TAKE:  Accelerate as many Miscellaneous Itemized Deductions as possible into 2017 if you will qualify for the deduction.

PLANNING TIP:  Some taxpayers may benefit from an ‘every other year’ itemized deduction plan where charitable contributions are heavy one year, light the next, heavy again the year after etc…

Other Provisions

Beginning in 2019 the alimony deduction will be repealed for any divorce or separation executed or modified after December 31, 2018.  This also means that the payee will not include alimony receipts in income.

Moving expense deductions will be eliminated (except as it applies to the military).

529 Savings Plans allow earnings and distributions to be tax free.  Under the new law, up to $10,000 per student per year can be used for elementary and secondary school education. 

PLANNING TIP:  Parents and grandparents may consider starting and contributing to 529 Savings Plans early (when a child is young) to take advantage of tax free growth to use for elementary and secondary education costs.

Child Tax Credits will increase from $1,000 per child to $2,000 per child (refundable up to $1,400) and subject to phase outs (starting at $400K for MFJ and $200K for other taxpayers).  There is also a temporary $500 non-refundable credit for other qualifying dependents.

The Obamacare Individual Mandate will be eliminated beginning in 2019.  Keeping this in place for 2018 will allow for stability in the health insurance markets and allow Congress more time to take action on health care law changes.

The exemption for the Federal Estate Tax will double beginning in 2018 to $11.2 million per individual ($22.4 million for a married couple) and increased each year for inflation (until 2025 when these provisions expire and the exemption is reduced back to current levels). 

Roth IRA Recharacterizations cannot be ‘unwound’ after 2017.  More careful and long-term planning will be required for this strategy.

Changes to business/corporate taxes will be discussed in another post, however, it should be noted that Schedule C businesses and Schedule E rental real estate will be eligible for the 20% of income deduction (subject to the normal limitations).

Like-kind exchanges under Section 1031 will be limited to only real property.

While more details and clarifications are sure to come, we have the next year to get a handle on these changes.  Please read the upcoming post on business tax changes where more planning will be needed to take full advantage of the new tax law provisions.

Check out our Resources & Guides page for more information on due dates, tax rates, and guides.