The Tax Cuts and Jobs Act signed into law December 22, 2017, by President Donald J. Trump is the largest tax code overhaul in 30 years. The reform itself is massive and contains many tax law changes, most of which are extremely complex and many which go into effect on January 1, 2018. This article explains some of the “most noteworthy” changes that affect the taxation of individuals. In addition to providing you with a summary of some of the changes, it also clearly defines the effective dates (many of which include an expiration or “sunset” provision).

Tax Rates lowered: For tax years beginning after December 31, 2017 and before January 1, 2026, seven rates apply: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate applies for taxable income at $500k for single individuals and $600K for married couples.

Child Tax Credit Increased: For tax years beginning after December 31, 2017 and before January 1, 2026, the child tax credit is increased to $2,000. The income levels at which the credit phases out is increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).

Standard Deduction increased: For tax years beginning after December 31, 2017 and before January 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers. No changes have been made to the current law concerning the additional standard deduction for the elderly and blind.

Personal Exemptions Suspended: For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.

State and Local Tax Deduction Limited: For tax years beginning after December 31, 2017 and before January 1, 2026; State, local, and foreign property taxes; and State and local sales taxes are deductible only when paid or accrued in carrying on a trade or business or an activity for the production of income. State and local income, war profits, and excess profits are not allowable as a deduction. However, a taxpayer may claim an itemized deduction of up to $10,000 for the aggregate of (1) State and local property taxes and (2) State and local income taxes (or sales taxes in lieu of income taxes) paid or accrued in the tax year.

Mortgage and Home Equity Indebtedness Interest Deduction limited: For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for interest on home equity indebtedness is suspended and the deduction for mortgage interest is limited to indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). For tax years beginning January 1, 2026, the prior $1 million/$500,000 limitations are restored. In addition, the suspension for home equity indebtedness also ends and the deduction of interest is restored.

Miscellaneous Itemized Deductions: For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended.

Medical Expense Deduction Threshold Temporarily Reduced: For 2017 and 2018, the threshold on medical expense deductions is reduced to 7.5% for all taxpayers. The former thresholds (10% for persons under age 65 and 7.5% for persons over age 65) will return on January 1, 2019.

Alternative Minimum Tax (AMT) retained but modified: For tax years beginning after December 31, 2017 and before January 1, 2026, the number of taxpayers subject to AMT will decrease as the exemption amounts are increased to $70,300 for individuals and $109,400 for married couples (from current amounts of $54,300 and $84,500 respectively).

Alimony Deduction by Payor/Inclusion by Payee Suspended: For any divorce or separation agreement executed after December 31, 2018 or executed before that date but modified after it, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

Moving Expenses Deduction Suspended: For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for moving expenses is suspended, 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.

Repeal of Obamacare Individual Mandate: For months beginning after December 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. The repeal is permanent. However, the Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.

Expanded Use of 529 Account Funds: For distributions beginning January 1, 2018, “qualified higher education expenses” include tuition at an elementary or secondary public, private or religious school, up to a $10,000 limit per tax year.

Lastly and certainly not least, here are some of the “key changes” related to businesses:

  • The corporate tax rate is reduced to 21%.
  • Businesses operating as pass-through entities (S corporations, LLC, partnerships, sole-proprietorships) can deduct, with certain limitations, 20% of the pass-through income.
  • Corporations can apply 100% expensing on capital expenditures over the next five years with gradual phase-out rules thereafter. There are also enhanced expensing rules for small businesses.
  • The deduction for net interest payments on corporate debt is limited to 30% of adjusted taxable income.
  • Domestic Production Activities Deduction repealed.

We understand that all of this can be overwhelming and intimidating. Please call our office for an in-depth analysis or if you have any specific questions or would like further clarifications on any part of the Tax Cuts and Jobs Act.