On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (the act or TCJA). The legislation makes significant changes to the Internal Revenue Code (IRC), including individual, corporate, and gift and estate taxation.
Although the act maintains seven tax brackets, these brackets have changed.
In addition to the changes made to the tax brackets, many exemptions and deductions for individual income tax have been repealed or modified.
• The personal exemption of $4,150 per taxpayer and dependent has been eliminated.
• The standard deduction for individuals has gone from $6,500 for individual taxpayers and $13,000 for married couples who file jointly to $12,000 for individual taxpayers and $24,000 for married couples who file jointly. This near doubling of the standard deduction will result in more taxpayers taking this deduction instead of itemizing.
• The legislation also places limits on several itemized deductions, listed in the table below.
In addition to the major modifications discussed above, several other changes in the bill may affect your financial decisions going forward. These are:
The child tax credit has been doubled, from $1,000 to $2,000, and the refundable portion of that credit is allowable up to $1,400. The act also grants a new credit of $500 for other dependents. These will phase out at income limits of $200,000 (single) and $400,000 (married).
Effective January 1, 2018, the individual unified gift and estate tax exemption has been raised to $11.2 million (up from what was set to be $5.6 million) and, with portability remaining intact, $22.4 million for a married couple. The top rate will remain 40 percent. The new rates are set to expire—and return to 2017 levels—at the end of calendar year 2025.
Under 2017 law, gifts of cash to charity offered a taxpayer the ability to deduct the contribution, up to 50 percent of AGI. The TCJA has increased the limitation to 60 percent of the taxpayer’s AGI.
The TCJA includes an expansion of 529 savings plans that allows families to save for K−12 expenses, in addition to college expenses. 529 plans will also be able to use qualified distributions for elementary and secondary school expenses, up to $10,000 per year, per student.
Beginning January 1, 2018, 1031 exchanges have been limited to real property.
Affordable Care Act individual mandate.
The TCJA eliminates the penalty imposed under the IRC for individuals who do not maintain individual health care coverage.
Individual alternative minimum tax (AMT).
The individual AMT exemption amount has increased to $70,300 for individual filers and $109,400 for joint filers. The phase-out for the AMT exemption has increased to $500,000 for individuals and $1 million for married couples. With enactment of the new act, fewer Americans will be subject to the AMT.
The TCJA eliminates the ability for a taxpayer to unwind a Roth conversion and “recharacterize” back to a traditional IRA. This applies to conversions occurring after January 1, 2018. Be sure to speak with our office before considering any new recharacterizations, as there is current debate as to whether Roth conversions that occurred in 2017 may still be characterized in 2018.
Pass-through business income.
Under law in effect for the 2017 tax year, all pass-through business income is taxed at the individual taxpayer’s marginal rate, as is most ordinary income. Under the TCJA, qualified pass-through business income will be addressed in a new IRC Section 199A as follows:
Please note: The changes to pass-through business income taxation sunset at the end of calendar year 2025, as written in the TCJA.
Although the changes to how individual income is taxed are set to expire at the end of 2025, the corporate tax changes provided for in the TCJA will be permanent. One of the largest tax cuts in the legislation lowers the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Furthermore, the TCJA completely repeals the corporate AMT. The act also imposes some limitations on certain corporate tax deductions, including those for net operating loss, business interest, and R&D expenditures.
Assess where you are headed
In light of these sweeping changes, 2018 should result in a complete review of your financial snapshots. An overall review of income, assets, and balance sheet is important in order to get a clear picture of how the significant changes to individual income taxation will affect you and your family.
More planning opportunities will continue to arise as the new tax code unfolds. Please reach out to our office so we can help you navigate these changes and answer any questions you may have.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.