TAX CUTS AND JOBS ACT OF 2017 – INDIVIDUAL UPDATES
On December 22, the President signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). TCJA is the largest tax overhaul in 30 years and will affect almost every individual taxpayer and business in the United States.
The following is a brief overview of TCJA’s key changes affecting individuals.
Tax Rates and Brackets. TCJA provides seven tax brackets, with most tax rates being two to three points lower than the ones under present law. The top tax rate is decreased from 39.9 percent to 37 percent. Capital Gain Rates and Net Investment Income Tax. Tax rates on capital gains and the 3.8 percent net investment income tax (NIIT) are unchanged by TCJA.
Personal Exemptions and Standard Deduction. TCJA eliminates the personal exemption (previously $4,050 per person), but nearly doubles the standard deduction amounts to $24,000 for joint filers and surviving spouses, $18,000 for head of household and $12,000 for single individuals and married filing separately. Additional deductions for elderly and blind taxpayers are retained.
Child Tax Credit and New Family Credit. As part of the repeal of personal exemptions, TCJA eliminated exemptions for dependents. To compensate, TCJA increases the child tax credit to $2,000 per child under the age of 17 (previously $1,000), and increases the modified adjusted gross income (AGI) threshold where the credit phases out. The new phase-out limits are $400,000 for joint filers and $200,000 for all others (up from $230,000 and $115,000 respectively). In addition, TCJA provides a $500 tax credit for other dependents, including dependent children age 17 and over.
Other Tax Breaks for Families are Unchanged. The child and dependent care credit, the adoption credit and the exclusions for dependent care assistance and adoption assistance under employer plans are all unchanged by TCJA.
Pass-through Tax Break. TCJA creates a new 20 percent deduction for qualified business income for sole proprietors, S Corporations and Partnerships. The deduction is claimed by individuals on their personal tax returns as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $157,500 ($315,000 for joint filers) are simpler and more permissive.
Example: In 2018, Joe receives a salary of $100,000 from his job at XYZ Corporation and $50,000 of qualified business income from a side business that he runs as a sole proprietor. Joe has no other items of income or loss. Joe’s deduction for qualified business income is $10,000 (20 percent of $50,000).
Deduction for State and Local Taxes. TCJA imposes a $10,000 limit on itemized deductions for state and local taxes, which includes both property taxes and income taxes (or sales taxes in lieu of income taxes), and eliminates the deduction for foreign property taxes. The limitation does not apply to business state and local taxes reported on Schedules C, E and F.
Mortgage Interest Deduction. TCJA reduces to $750,000 (from $1 million) the limit on the loan amount for which a mortgage interest deduction can be claimed by individuals, with existing loans grandfathered. TCJA also eliminates the itemized deduction for interest on home equity loans. Deduction for Medical Expenses. TCJA retains the itemized deduction for unreimbursed medical expenses and lowers the adjusted gross income floor to 7.5 percent (from 10 percent) for all taxpayers for tax years 2017 and 2018.
Deduction for Casualty and Theft Losses. TCJA eliminates the itemized deduction for casualty and theft losses, except for losses incurred in presidentially declared disaster areas.
Deduction for Charitable Contributions. TCJA retains the itemized deduction for charitable contributions and increases the maximum contribution percentage limit to 60 percent (up from 50 percent) of adjusted gross income .
Deduction for Miscellaneous Itemized Deductions subject to two percent Floor. TCJA eliminates all miscellaneous itemized deductions that are subject to the two percent of AGI floor under present law, including investment expenses, tax preparation fees, unreimbursed employee business expenses and certain repayments of income.
Repeal of Alimony Deduction. TCJA eliminates the deduction for alimony paid and also the corresponding inclusion in income by the recipient, effective for tax years beginning in 2019. Alimony paid under divorce or separation agreements entered into prior to 2019 will generally be grandfathered under the new rules. Note that this provision does not take effect until tax year 2019.
Education-Related Tax Breaks and Expanded Use for 529 Plan Distributions. TCJA retains deductions for student loan interest and educator expenses, and also exclusions for graduate student tuition wavers and employer educational assistance programs. In addition, TCJA allows 529 plan distributions to be used for elementary and secondary school tuition, limited to $10,000 per student per year. Under present law, 529 distributions can only be used for higher education expenses.
Repeal of Moving Expense Deduction. TCJA eliminates the deduction and the exclusion from income provision for moving expenses except for active duty military with a permanent change of station. Alternative Minimum Tax (AMT). TCJA increases AMT exemption amounts by 27 percent, and sharply increases the income level where the exemption is phased out. Combined with the effects of other TCJA changes, many individuals who are currently subject to AMT in 2017 will not be in 2018 and beyond. Repeal of Individual Healthcare Mandate. TCJA eliminates the tax penalty on individuals who fail to carry health insurance enacted as part of the Affordable Care Act (ACA), effective for tax years beginning in 2019. Note that the penalty will still apply for tax years 2017 and 2018.
Estate and Gift Tax Exclusion. TCJA permanently doubles the basic exclusion amount for estate and gift tax purposes from $5.6 million to $11.2 million.
Most tax law changes for individuals are temporary. Most individual TCJA provisions are set to expire December 31, 2025.
(Updated January 22, 2018)