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Individual - Tax Changes

In December 2017, President Trump and Congress enacted the massive new “Tax Cuts and Jobs Act” (TCJA), which constituted nearly 1,100 pages and dramatically changes tax laws as applicable to individuals and businesses.

The following summarizes the changes impacting individual tax returns. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.

Tax rates. The new law’s most significant and sweeping changes were to the tax rate structure and upper thresholds of the rate brackets of taxable income. The following table summarizes the upper thresholds of ordinary taxable income in each tax bracket for each individual filing status in 2018 as changed by the new law. For comparison, the following table summarizes the upper thresholds of ordinary taxable income in each tax bracket in 2017:



Some highlights:
• The number of tax brackets did not change from seven; however the individual rates and upper thresholds of each bracket were modified.
• The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly.

“Kiddie Tax”. The "kiddie tax" rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates, which likely will result in a higher tax liability. Thus, the child's tax will no longer be affected by or dependent upon the parent's tax situation or the unearned income of any siblings.

Capital Gains Tax Rates. The rates applicable to net capital gains and qualified dividends were not changed and will remain at 0%, 15%, and 20%, dependent upon taxable income.

Standard deduction. The standard deduction is increased effective in 2018 to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.

Exemptions. The deduction for personal exemptions is removed. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The IRS has issued new withholding tables based on these changes to take effect with late January or February paychecks.

Child and family tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer's dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers). Determining the ultimate effect of the combination of the changes in standard deduction, exemptions, and family tax credit may require additional tax planning with a CPA and tax professional for many taxpayers.

New deduction for "qualified business income". Beginning in 2018, taxpayers are allowed a deduction equal to 20 percent of "qualified business income," otherwise known as "pass-through" income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. This new deduction is covered more in-depth in our business highlights report.

State and local taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018. This combined total will encompass all state and local income, property, and other taxes. Property or other taxes on rental or other business property remain deductible against the rental or business income, not subject to this limitation.

Mortgage interest. Mortgage interest on loans used to acquire a principal residence and a second home (“acquisition debt”) is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. Loans taken out prior to 2018 are grandfathered under the $1 million cap.

Home Equity Loan Interest. Interest on home equity loans is no longer deductible in most cases, regardless of when the debt was incurred.

Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as non-business tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.

Medical expenses. For 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI "floor" was 10% for most taxpayers.

Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster. • Overall limitation on itemized deductions. The overall limitation on itemized deductions, which formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds, is suspended.

Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse. Agreements entered into in 2018 and prior years will be deductible by the paying spouse and taxable to the receiving spouse.

Health care "individual mandate". Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage. The penalty for not having minimum essential health coverage remains in effect for 2018.

Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples). The gift allowance for 2018 has been increased to $15,000 from $14,000.

Other provisions. The law changed numerous other tax provisions, including those applicable to gambling losses, credits, moving expenses, 529 plan distributions, the Alternative Minimum Tax (AMT), and Roth IRA Re-conversions, among others. The changes on this list are not comprehensive, and the IRS is still in the process of providing interpretations for all these new provisions for 2018 tax returns. Accordingly, the impact of the new tax law on each individual’s personal tax picture may vary. For personalized advice or if you have any questions regarding about the effect of the TCJA on your personal situation, please contact one of the tax professionals at Cukierski & Cochrane, LLC, who will be able to assist you.