Individual Income Tax Changes
Here is a brief summary of the provisions of the tax bill that is being debated in congress this week that affect individual taxpayers. We will post the business related provisions separately. We have tried to mention the most common items:
Tax Rates and Brackets: The tax rate brackets have changed and the rates have been decreased slightly. For example, here is the tax rate schedule for Married Filing Joint taxpayers for 2017 and the proposed schedule for 2018:
Standard Deduction: Amounts have been increased.
Personal Exemptions: The subtraction for personal exemptions has been eliminated. In 2017 the amount is $4,050 each.
Kiddie Tax: For children subject to this tax, the “unearned” (investment) income is now subject to tax using the rates and brackets applicable to trusts and estates. Under prior law, the calculation used the rates from the parent’s return.
Capital Gains: In general, the rates applicable to capital gains are unchanged. The breakpoints at which the rates change have been indexed for inflation.
Pass-through Income Deduction: In order to lower the income tax rate that applies to sole proprietorships, partnerships, limited liability companies, and S corporations, the law creates a new deduction which will decrease the amount of income subject to income tax. The calculation is complicated! This is a significant item even though the explanation here is short.
Casualty Losses: This deduction is eliminated unless the loss was incurred in a Federally-declared disaster area.
Child Tax Credit: The credit is increased from $1,000 to $2,000 and the refundable portion is increased to $1,400 per qualifying child. The income levels where this credit phases out are increased significantly. (MFJ from $110,000 to 400,000 and Single from $75,000 to $200,000.
State and Local Tax Deduction: State, local, and foreign property taxes, and state and local sales taxes are deductible when incurred and paid in the course of a trade or business (for example, real property taxes on rental property). Taxpayers may deduct, as an itemized deduction, up to $10,000 (MFJ) of property taxes and state/local income (or sales) taxes paid. Foreign real property taxes may not be deducted.
There is a restriction that would deny a deduction in 2017 for pre-paying your 2018 state tax before the end of this year. For example, you cannot prepay your 2018 property taxes in 2017 and claim them as an itemized deduction. It might be a good idea to pay the final state/local estimated tax payment for your 2017 state/local tax prior to the end of this year. Since the fourth quarter state/local estimated tax payment is for your 2017 taxes, the prepayment in 2017 should be deductible.
Mortgage & Home Equity Interest: The deduction for interest paid on home equity loans is eliminated beginning in 2018. The deduction for mortgage interest is limited to underlying debt of $750,000 (MFJ).
The new lower limits do not apply to acquisition debt incurred before December 15, 2017. There are provisions for purchases covered by binding written contracts before December 15, 2017 where the purchase in closed before April 1, 2018. Those transactions will qualify for the old limit of $1,000,000 (MFJ).
Refinancing of acquisition debt that existed prior to December 31, 2017 will continue to qualify for the $1,000,000 (MFJ) limit.
Alimony: For divorce or separation agreements executed after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.
Miscellaneous Itemized Deductions: Beginning in 2018, the deduction for miscellaneous itemized deductions that are subject to the 2% of AGI floor are eliminated. Common deductions in this category include employee business expenses, investing expenses (investment advisor fees), union dues, and tax preparation fees.
Itemized Deduction Phase Out: The phase out of itemized deductions for high income taxpayers is eliminated.
Moving Expense and Reimbursements: Except for certain active duty armed forces, moving expenses are no longer deductible after 2017. In addition, moving expense reimbursements from employers are no longer excluded from wages.
Medical Expenses: The floor for deducting medical expenses which had been 10% (7.5% if 65 or older) has been reduced to 7.5% for everyone. This change appears to be effective beginning for 2017. Also, it appears that the 10% floor is reinstated in 2019.
Obamacare Mandate: For months beginning after December 31, 2018, the penalty for failing to obtain health insurance that provides minimum essential coverage is reduced to zero.
Both the 3.8% net investment income tax and the 0.9% additional Medicare taxes that were enacted as part of Obamacare continue to apply.
Estate and Gift Tax: The tax is not repealed, but the exemption amounts have been doubled from $5 million to $10 million per person (as adjusted for inflation). The inflation adjusted amount for 2018 is expected to be $11.2 million.
Alternative Minimum Tax: This tax has not been repealed. The exemption amounts have been increased. For married filing joint taxpayers the AMT exemption has increased from $86,200 to $109,400. For single taxpayers, the increase is from $55,400 to $70,300. Also, the exemption phase-out threshold has been significantly increased.
While the AMT exemptions and exemption phase-out ranges are increased, taxpayers who are subject to AMT may find that tax to be larger than in the past. We recommend that taxpayers with large capital gain transactions and other AMT preferences meet with their accountant to consider planning options before finalizing the transactions.
529 Plan Expansion: For distributions after 2017, the definition of “qualified higher education expenses” has been expanded to include tuition at an elementary or secondary public, private, or religious school, and various expenses associated with home school, up to $10,000 per tax year.
This article was updated to add more details to the State and Local Tax deduction and Alternative Minimum Tax sections.