Tax Cuts and Jobs Act: What You Need to Know
By Paul Morrone CFP®, CPA, MSA
The Tax Cuts and Jobs Act may be the most hotly debated piece of legislation that will ever pass over President Trump's desk. The final text of the bill has reached nearly 1,100 pages in length and includes provisions that will affect every taxpayer, no matter how large or small. However, what many fail to realize is that the foundation of our "new" tax code is still the antiquated, complicated and widely misunderstood Internal Revenue Code of 1986.
Merely cutting taxes in the new legislation does not promise or guarantee any form of permanency to the changes enacted through the Tax Cuts and Jobs Act, at least for individual taxpayers. While some of the corporate changes are intended to be permanent (including the lower top tax rate of 21%), many of these provisions at the individual level are set to sunset, or expire, in 2026. True tax reform, as many had hoped for, would have made inherent, permanent changes to our complicated internal revenue code, which is an understandably massive undertaking that could not conceivably be completed in less than a year. While not the sweeping reform many were hoping for, passage of the Act does impact all taxpayers, large and small alike.
Below is a summary of the material changes that may impact the individual taxpayer. There are many provisions that impact business, as well, that are not included below. This is not meant to be an all-inclusive, but should provide a general outline of the major provisions that are set to affect individual taxpayers in the upcoming 2018 tax year.
- Lowers rates applied to all 7 taxable income levels, with a max of 37%
- Increases the standard deduction ($24,000 for joint filers, $12,000 for single filers, $18,000 for head of household)
- Increases the child tax credit to $2,000 per qualifying child (under 17), increases the income phaseout amounts to $200k (single) and $400k (joint)
- Creates a credit for qualifying child and non-child (over 17) dependents of $500 per individual
- Increases AMT exemptions to $70,300 (single) and $84,500 (joint)
- Increases estate tax exemption to $11.2mm per person ($22.4mm for couples), indexed for inflation
- 529 Plans - funds can now be used for qualified expenses (up to $10k/year) for elementary and secondary education tuition and fees, no longer limited to post-secondary education costs
- Pass-through business deduction - allows for a 20% deduction of qualified business income for owners of certain pass-through entities (subject to limitations for specified service businesses)
- Eliminates personal exemptions
- Disallows deductibility of interest on home equity loans and lines of credit
- Disallows mortgage interest deduction on principal debt in excess $750k (currently $1.0mm), existing loans with principal debt up to $1.0mm be grandfathered
- Caps State and Local Tax deduction to a total of $10,000 for income, property and sales taxes paid
- Deduction for moving expenses is eliminated
- Modifies deductibility of remaining itemized deductions, as follows:
- Charitable contributions (subject to AGI limitations - 60% for public charities)
- Mortgage interest (limited to home acquisition debt of $750k),
- State and Local tax deduction (limited to cap of $10,000), and;
- Qualified medical expenses (subject to 7.5% of AGI limitation for 2018 and 2019 only)
- Eliminates the following itemized deductions:
- Unreimbursed employee business expenses (including home office deduction)
- Tax prep fees
- Safety deposit box fees
- Investment advisory fees
- Casualty losses (except if you are in a qualified disaster zone as determined by the President)
- Eliminates recharacterization of ROTH IRAs after 12/31/17
Other Material Changes
- Alimony will no longer be deductible by the payor and includible in income for the payee, beginning with all divorce decrees finalized after 1/1/19 (existing agreements will be grandfathered)
- Eliminates the Obamacare individual mandate, meaning those without health insurance would no longer be penalized (effective 2019)
- Slows inflation adjustments for future tax years by using 'chained CPI'
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.