Authored By James L. Hamilton
Contact 847.441.8800
Email: jhamilton@weisscpa.com

Tax Reform for Individuals

The “Tax Cuts and Jobs Act” (TCJA) contains many key provisions affecting individual taxpayers. Most provisions in the bill expire after December 31, 2025.  The list below includes many of these changes:

Tax rates:

The new law lowers tax rates for individuals and adjusts the bracket amounts. The top individual rate will be 37% for joint filers with more than $600,000 of taxable income and single (and head of household) filers with more than $500,000 of taxable income. For 2018 through 2025, the tax rate brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. Estates and trusts will only be taxed at the 10%, 24%, 35% and 37% rates, with the 37% rate applying to taxable income over $12,500.

Standard deduction:

The standard deduction will be $24,000 for joint filers, $18,000 for head of household filers and $12,000 for single filers (up from 2017 amounts of $12,700, $9,350 and $6,350, respectively). The additional standard deduction for the elderly and blind are retained.

Personal exemptions:

The personal exemptions, including exemptions available for qualified dependent children and relatives, are repealed through 2025.

Alternative minimum tax:

The alternative minimum tax system is retained, but exemption amounts, as well as the thresholds for phasing out exemptions, are significantly increased. These figures will be indexed for inflation in future years. The individual AMT exemption amounts have been increased to $109,400 for joint filers and $70,300 for single filers for 2018.

Child tax credit:

The Child Tax Credit is increased to $2,000 per qualifying child (doubled from $1,000 per qualifying child), with up to $1,400 being fully refundable. An additional $500 credit may be available for other non-child dependents. The Credit begins to phase out for joint filers with adjusted gross income exceeding $400,000 and single filers with adjusted gross income exceeding $200,000, respectively.

Medical expenses:

The medical expenses itemized deduction is made more available for taxpayers under age 65 by reducing the adjusted gross income (AGI) floor for 2017 and 2018 to 7.5% for all taxpayers. The threshold previously was 10% of AGI for taxpayers under age 65.

State and local taxes:

The itemized deduction for state and local taxes has been limited to $10,000 for the sum of (1) real property taxes, (2) personal property taxes, and (3) either state or local income taxes or state and local sales tax.

Mortgage interest:

The itemized deduction for mortgage interest has been reduced to only permit the deduction of interest on acquisition indebtedness not exceeding $750,000. Debt incurred on or before December 15, 2017, is grandfathered under the previous law that allows interest paid on acquisition indebtedness of up to $1 million. The additional interest deduction for home equity indebtedness is repealed through 2025.

Charitable contributions:

The adjusted gross income limitation for cash contributions to certain charitable organizations is increased to 60% of AGI. No charitable deduction is allowed for payments made in exchange for athletic seating rights (previously able to deduct 80% of amounts paid).

Casualty and theft losses:

This itemized deduction is repealed through 2025, but it is preserved, with certain modifications, for losses incurred in federal disaster areas.

Miscellaneous itemized deductions:

All miscellaneous itemized deductions subject to the 2% adjusted gross income floor have been repealed through 2025, including miscellaneous itemized deductions for investment fees/expenses, tax preparation fees, and unreimbursed employee business expenses.

“Pease limitation”:

The overall limitation on itemized deductions has been repealed through 2025.

Section 529 plans:

The list of qualified expenses for Section 529 plans is expanded to include tuition at an elementary or secondary public, private or religious school, plus home schooling expenses, for up to $10,000 per year.

Roth IRAs:

The rule permitting taxpayers to recharacterize a Roth IRA back into a traditional IRA after a conversion is repealed.

Moving expenses:

The deduction for moving expenses is repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station. The exclusion from gross income and wages for qualified moving expense reimbursements is also repealed.

Alimony:

For any divorce or separation agreements entered into after December 31, 2018, the deduction for alimony or separate maintenance payments is repealed. Recipients of alimony or separate maintenance payments will no longer be required to include those payments in their gross income. Existing alimony and separate maintenance agreements are grandfathered under the prior law.

Health insurance:

The shared responsibility payment for individuals failing to maintain minimum essential health insurance coverage has been reduced to $0, beginning after December 31, 2018.

Business losses:

Business losses are only permitted in the current year to the extent they do not exceed the sum of: 1) taxpayer’s gross income, and (2) $500,000 for joint filers or $250,000 for other taxpayers. Excess business losses will be disallowed and added to the taxpayer’s net operating loss carryforward.

Net Operating Losses:

Net operating losses are limited to 80% of taxable income, and may only be carried forward to future tax years.

“Kiddie Tax”:

Children subject to the “Kiddie Tax” will have two different tax regimes for their earned and unearned income. Earned income will be taxed at the rates applied to single filers. Unearned income will be taxed at ordinary income rates applied to trusts and estates.

Estate & Gift Tax:

Beginning in 2018, the lifetime exemption for estate and gift taxes is increased to $11,200,000

Pass-through entities:

Partners, shareholders of S corporations, sole proprietors and LLCs may obtain a pass through business deduction as follows:  Unless the taxpayer is below the threshold amounts described below, the deductible amount for a qualified business is the lesser of: 20% of the taxpayer’s qualified business income from the qualified business or the greater of: (i) 50% of the W-2 wages relating to the qualified business or (ii) the sum of 25% of the W-2 wages relating to the qualified business and 2.5% of the unadjusted basis immediately after acquisition of all qualified property. For taxpayers in a service business (e.g., law, accounting, healthcare, etc.), no deduction is permitted unless taxable income is less than the threshold amounts of $157,500 ($315,000 if married filing a joint return).


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