Tax Cuts and Jobs Act: What the Tax Reform Bill Means for You & Your Individual Taxes

Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. There are substantial changes in the new bill.

You can use this memo as a high-level overview of some of the most significant items in the new bill. Because major tax reform like this happens so seldom, it may be worthwhile for you to schedule a tax-planning consultation early in the year to ensure you reap the most tax savings possible during 2018.

Key changes for individuals:

Here are some of the key items in the tax reform bill that affect individuals:

    • Reduces income tax brackets: The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent. The individual income brackets are also expanded to expose more income to lower rates (see charts below).
    • Doubles standard deductions: The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
    • Limits itemized deductions: Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
      • Caps state and local tax deductions: State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
      • Caps mortgage interest deductions: For newly acquired homes, mortgage interest will be deductible only for mortgages of less than $750,000. Existing homeowners are unaffected by the new cap. The bill also suspends the deductibility of interest on equity debt unless the funds from the loan were used to buy, build, or substantially improve the taxpayer's home that secures the loan.
      • Limit of theft and casualty losses: Deductions are now available only for federally declared disaster areas.
      • No more 2 percent miscellaneous deductions: All miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
      • Tip: If you’re used to itemizing your return, that may change in coming years as the doubled standard deduction and reduced deductions make itemizing less attractive. To the extent you can, make any remaining itemizable expenditures before the end of 2017.
    • Cuts some above-the-line deductions: Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions for divorce agreements signed after 2018.
    • Weakens the alternative minimum tax (AMT): The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
    • Bumps up child tax credit, adds family tax credit: The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
    • Expands use of 529 education savings plans: Tax-deductible contributions to 529 education savings plans can now be used to pay tuition for students in K-12 private schools.
    • Doubles estate tax exemption: Estate taxes will apply to even fewer people, with the exemption doubled to $11.2 million ($22.4 million for married couples).

What stays the same for individuals:

      • Itemized charitable deductions: Remain largely the same.
      • Itemized medical expense deductions: Remain largely the same. The deduction threshold drops back to 7.5 percent of adjusted gross income for 2017 and 2018, but reverts to 10 percent in the following years.
      • Some above-the-line deductions: Remain the same, including educator expenses and student loan interest.
      • Gift tax deduction: Remains and increases to $15,000 from $14,000 for 2018.
      • Kiddie tax threshold:Remains at $2,100 (amount of unearned income that can be taxed at your child’s lower tax rate). Amounts above the limit are subject to taxation using brackets for estates and trust, which reach the maximum rate of 37% at taxable income above $12,500.

Farewell to the healthcare individual mandate penalty

One of the changes in the tax bill is the repeal of the Affordable Care Act (also known as “Obamacare”) individual mandate penalty. The penalty is set to zero starting in 2019, but remains in place for 2018 and prior years.

      • Tip: Retain your Form 1095s this year, which will provide evidence of your healthcare coverage. Without it, you may have to pay the higher of $695 or 2.5 percent of income, though 2018 may be the last year you’ll need to worry about it.

New 2018 tax bracket structures for individuals

SINGLE TAXPAYER

Taxable income over

$0

$9,525

$38,700

$82,500

$157,500

$200,000

$500,000

But not over

$9,525

$38,700

$82,500

$157,500

$200,000

$500,000

Is taxed at

10%

12%

22%

24%

32%

35%

37%

HEAD OF HOUSEHOLD

Taxable income over

$0

$13,600

$51,800

$82,500

$157,500

$200,000

$500,000

But not over

$13,600

$51,800

$82,500

$157,500

$200,000

$500,000

Is taxed at

10%

12%

22%

24%

32%

35%

37%

MARRIED FILING JOINTLY

Taxable income over

$0

$19,050

$77,400

$165,000

$315,000

$400,000

$600,000

But not over

$19,050

$77,400

$165,000

$315,000

$400,000

$600,000

Is taxed at

10%

12%

22%

24%

32%

35%

37%

MARRIED FILING SEPARATELY

Taxable income over

$0

$9,525

$38,700

$82,500

$157,500

$200,000

$300,000

But not over

$9,525

$38,700

$82,500

$157,500

$200,000

$300,000

Is taxed at

10%

12%

22%

24%

32%

35%

37%

This tax law will go into effect during 2018, so there are a few things you should consider this year:

  • If divorce is imminent and you will be paying alimony get it finished during 2018. The agreement needs to be signed and in full effect during 2018 so that alimony will be deductible going forward.
  • Consider paying down balances on home equity loans that were used to fund expenses other than home improvements or expansion. The interest from this type loan will not be deductible during 2018 or future years until 2026.
  • The standard deduction increased for all taxpayers. Many taxpayers that were accustomed to itemizing will now fall below the standard deduction. Review deductions from prior years and reevaluate payment of those expenses to see if they still make sense. It may be wise to employ a bunching strategy if you are close to the limit but just under it.
  • Miscellaneous itemized deductions subject to the 2% threshold will not be deductible in 2018. If you have unreimbursed business deductions that fall into this category, you should ask your employer to establish an accountable plan and fund the plan with a reduction in salary. These plans allow you to receive tax free reimbursements of business expenses.

This brief summary of the tax reform bill is provided for your information and is general in nature and may not apply to all taxpayers. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call if you have questions regarding your particular situation. Feel free to share this memo with those you think may benefit from it.