Changes for Individuals Under the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 was signed by President Trump on December 22nd. The Act makes sweeping changes to the U.S. Tax Code and impacts virtually every taxpayer.  With the reduction in effective tax rates, the elimination of some deductions, exclusions, and credits coupled with the enhancement of other deductions and credits, individual taxpayers are going to have to navigate a different maze in making decisions to maximize their tax benefits and minimize their tax liability. We are committed to guiding you through this process to achieve the best outcome for you individually.

The following is a brief summary of the provisions of the Tax Cuts and Jobs Act (H.R. 1) that will have the most impact on individuals:

  • Tax Rates – H.R. 1 lowers almost every tax bracket. The new tax rates for 2018 are 10, 12, 22, 24, 32, 35, and 37%, down from 2017 rates of 10, 15, 25, 28, 33, 35, and 39.6%. Each tax bracket is also broadened, raising the income threshold for each rate, so that more individuals will fall into lower tax brackets.
  • Standard Deduction – H.R. 1 nearly doubles the standard deduction for 2018. It is now $24,000 for married filing joint returns and $18,000 for single individuals, up from $12,700 and $6,350 respectively in 2017. This increase means that fewer taxpayers will benefit from itemizing deductions and instead can take the simpler route of using the standard deduction. The additional standard deduction for elderly and blind taxpayers remains the same.
  • Personal Exemptions – The Act eliminates all personal exemptions. The exemption amount was set at $4,050 per person in 2017. The interplay of an increased standard deduction with elimination of personal exemptions may be beneficial to taxpayers with small households, but those benefits may be decreased for larger households.
  • Itemized Deductions
    • Mortgage Interest – For 2018, the deduction of mortgage interest is limited to home acquisition loans up to $750,000. This is a decrease to the previous limit of $1,000,000. This new limitation generally applies only to loans beginning after December 31, 2017. Taxpayers may continue to deduct mortgage interest on a second home, however the total combined mortgage amount is still limited to $750,000. Interest on home equity loans is no longer deductible.
    • Taxes – Individuals may still deduct either state and local income taxes or sales tax, in addition to property taxes. However, the total combined deduction for taxes is now limited to $10,000.
    • Medical Expenses – For 2017 and 2018, the threshold for deducting medical expenses was decreased to 7.5% of Adjusted Gross Income (AGI). In 2019 and beyond, the threshold will return to 10% of AGI.
    • Miscellaneous Itemized Deductions – All miscellaneous itemized deductions subject to the 2% of AGI threshold have been eliminated, such as the deductions for tax preparation fees, investment fees, and unreimbursed employee expenses, among others.
    • “Pease limit” – Total itemized deductions will no longer be subject to a phase out.
  • Child Tax Credit – H.R. 1 increases the child tax credit to $2,000 per qualifying child, up from $1,000 in 2017. The portion of the credit that can be received as a refund is limited to $1,400. The Act also creates a new credit of $500 for qualifying dependents who are not qualifying children, such as an elderly parent or disabled family member. These credits begin to phase out at Adjusted Gross Income (AGI) of $400,000 for married filing joint returns and $200,000 for single individuals. This phase out threshold is a significant increase from the previous amounts of $110,000 and $75,000 AGI, respectively.
  • Education Benefits – There were no changes to the American Opportunity Credit or the deduction for student loan interest. Section 529 plans have formerly been reserved for higher education costs only. A significant change made by H.R. 1 now allows distributions from 529 plans for elementary and secondary school tuition. Distributions are limited to $10,000 per student, per tax year.
  • Alimony – Under H.R. 1, payment of alimony is no longer deductible and the receipt of alimony is no longer included in income. This applies only to divorce or separation agreements executed after December 31, 2018.
  • Alternative Minimum Tax – The Act increases the AMT exemption amount to $109,400 for married filing joint returns and $70,300 for single individuals (previously $84,500 and $54,300 respectively in 2017). The threshold at which the AMT exemption phases out is also significantly increased. The phase out now begins at $1,000,000 for married filing joint returns and $500,000 for single individuals (previously $160,900 and $120,700 respectively in 2017.)
  • Health Insurance – H.R. 1 did not repeal or make any sweeping changes to the Affordable Care Act or other healthcare laws. However, H.R. 1 did eliminate the penalty on individuals who do not have health insurance that meets the minimum essential coverage requirement. Although the law still requires individuals to maintain adequate health insurance, removal of the penalty effectively eliminates the “individual mandate.”
  • Pass-through Income Deduction – This significant change enacted by H.R. 1 will generally allow individuals to deduct 20% of “qualified business income” from a partnership, S corporation, sole proprietorship, and certain other sources of pass-through income. This deduction is subject to several limitations and phase outs.

These are just highlights of the changes and impact of the Tax Cuts and Jobs Act that will effect individuals. Other significant changes were also made that will impact businesses. There is much more to discuss than can be covered in this blog post. Tax reform is further complicated because many of the changes are temporary, generally ending after 2025. Therefore, a comprehensive tax plan must be flexible and anticipate either expiration of these changes or possible extenders in years to come.

We would be grateful for the opportunity to meet with you to discuss how these changes will impact you individually and help you develop the most advantageous plan for both the present and the future.