Taxes

3
Jan

Tax Cuts and Jobs Act: Impact on Individuals

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.

Individual income tax rates

The legislation replaces most of the seven current marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts and replaces existing “kiddie tax” provisions (under which a child’s unearned income is taxed at his or her parents’ tax rate) by effectively taxing a child’s unearned income using the estate and trust rates.

Single
If taxable income is: Then income tax equals:
Not over $9,525 10% of the taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $45,689.50 plus 35% of the excess over $200,000
Over $500,000 $150,689.50 plus 37% of the excess over $500,000

 

Head of Household
If taxable income is: Then income tax equals:
Not over $13,600 10% of the taxable income
Over $13,600 but not over $51,800 $1,360 plus 12% of the excess over $13,600
Over $51,800 but not over $82,500 $5,944 plus 22% of the excess over $51,800
Over $82,500 but not over $157,500 $12,698 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $30,698 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $44,298 plus 35% of the excess over $200,000
Over $500,000 $149,298 plus 37% of the excess over $500,000

 

Married Individuals Filing Joint Returns
If taxable income is: Then income tax equals:
Not over $19,050 10% of the taxable income
Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050
Over $77,400 but not over $165,000 $8,907 plus 22% of the excess over $77,400
Over $165,000 but not over $315,000 $28,179 plus 24% of the excess over $165,000
Over $315,000 but not over $400,000 $64,179 plus 32% of the excess over $315,000
Over $400,000 but not over $600,000 $91,379 plus 35% of the excess over $400,000
Over $600,000 $161,379 plus 37% of the excess over $600,000

 

Married Individuals Filing Separate Returns
If taxable income is: Then income tax equals:
Not over $9,525 10% of the taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $300,000 $45,689.50 plus 35% of the excess over $200,000
Over $300,000 $80,689.50 plus 37% of the excess over $300,000

Standard deduction and personal exemptions

The legislation roughly doubles existing standard deduction amounts but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.

2018 Standard Deduction Amounts

Filing Status Before Tax Cuts and Jobs Act After Tax Cuts and Jobs Act
Single or Married Filing Separately $6,500 $12,000
Head of Household $9,550 $18,000
Married Filing Jointly $13,000 $24,000

Itemized deductions

The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) is repealed, and the following changes are made to individual deductions: 

  • State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
  • Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limits will continue to apply. No deduction is allowed for interest on home equity indebtedness.
  • Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns to 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT) for the two years as well.
  • Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deduct certain cash gifts is increased from 50% to 60%.
  • Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.
  • Miscellaneous itemized deductions — Miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Child tax credit

The child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The maximum amount of the credit that may be refunded is $1,400 per qualifying child, and the earned income threshold for refundability falls from $3,000 to $2,500 (allowing those with lower earned incomes to receive more of the refundable credit). The income level at which the credit begins to phase out is significantly increased to $400,000 for married couples filing jointly and $200,000 for all other filers. The credit will not be allowed unless a Social Security number is provided for each qualifying child. 

A new $500 nonrefundable credit is available for qualifying dependents who are not qualifying children under age 17.

Alternative minimum tax (AMT)

The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.

2018 AMT Exemption Amounts

Filing Status Before Tax Cuts and Jobs Act After Tax Cuts and Jobs Act
Single or Head of Household $55,400 $70,300
Married Filing Jointly $86,200 $109,400
Married Filing Separately $43,100 $54,700

2018 AMT Exemption Phaseout Thresholds

Filing Status Before Tax Cuts and Jobs Act After Tax Cuts and Jobs Act
Single or Head of Household $123,100 $500,000
Married Filing Jointly $164,100 $1,000,000
Married Filing Separately $82,050 $500,000

Other noteworthy changes

  • The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.
  • Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in the following years.
  • In a permanent change that starts in 2018, Roth conversions cannot be reversed by recharacterizing the conversion as a traditional IRA contribution by the return due date.
  • For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse and are not included in the income of the recipient. This is also a permanent change.

For another overview of the new tax laws, please read our blog post here.

27
Dec

Tax Cuts And Jobs Act

tax cuts and jobs actThe Tax Cuts and Jobs Act legislation has been passed by Congress and awaits the president’s signature. The Act makes extensive changes that affect both individuals and businesses. Some key provisions of the Act are discussed below. Most provisions are effective for 2018. Many individual tax provisions sunset and revert to pre-existing law after 2025; the corporate tax rates provision is made permanent. Comparisons below are generally for 2018.

Individual income tax rates

Pre-existing law. There were seven regular income tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

New law. There are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These provisions sunset and revert to pre-existing law after 2025.

Income Bracket Thresholds

Tax Rate

Single

Married Filing Jointly/ Surviving Spouse

Married Filing Separately

Head of Household

Trust/Estate

10%

$0

$0

$0

$0

$0

12%

$9,525

$19,050

$9,525

$13,600

N/A

22%

$38,700

$77,400

$38,700

$51,800

N/A

24%

$82,500

$165,000

$82,500

$82,500

$2,550

32%

$157,500

$315,000

$157,500

$157,500

N/A

35%

$200,000

$400,000

$200,000

$200,000

$9,150

37%

$500,000

$600,000

$300,000

$500,000

$12,500

Standard deduction, itemized deductions, and personal exemptions

Pre-existing law. In general, personal (and dependency) exemptions were available for you, your spouse, and your dependents. Personal exemptions were phased out for those with higher adjusted gross incomes.

You could generally choose to take the standard deduction or to itemize deductions. Additional standard deduction amounts were available if you were blind or age 65 or older.

Itemized deductions included deductions for: medical expenses, state and local taxes, home mortgage interest, investment interest, charitable gifts, casualty and theft losses, job expenses and certain miscellaneous deductions, and other miscellaneous deductions. There was an overall limitation on itemized deductions based on the amount of your adjusted gross income.

New law. The standard deduction is significantly increased, and the additional standard deduction amounts for those over age 65 or blind are still available. The personal and dependency exemptions are no longer available.

Many itemized deductions are eliminated or restricted. The overall limitation on itemized deductions based on the amount of your adjusted gross income is eliminated.

• The 10% of AGI floor for the deduction of medical expenses is reduced to 7.5% in 2017 and 2018 (for regular tax and alternative minimum tax).

• The deduction for state and local taxes is limited to $10,000. An individual cannot prepay 2018 income taxes in 2017 in order to avoid the dollar limitation in 2018.

• The deduction for mortgage interest is still available, but the benefit is reduced for some individuals, and interest on home equity loans is no longer deductible.

• The charitable deduction is still available, but modified.

• The deduction for personal casualty losses is eliminated unless the loss is incurred in a federally declared disaster.

These provisions sunset and revert to pre-existing law after 2025.

Standard deduction, itemized deductions, and personal exemptions

Personal and Dependency Exemptions (you, your spouse, and dependents)

Pre-existing law

New law

Exemption

$4,150

No personal exemption

 

Standard Deduction

Pre-existing law

New law

Married filing jointly

$13,000

$24,000

Head of household

$9,550

$18,000

Single/married filing separately

$6,500

$12,000

Additional aged/blind

Single/head of household

$1,600

$1,600

All other filing statuses

$1,300

$1,300

 

Itemized Deductions

Pre-existing law

New law

Medical expenses

Yes, to extent expenses exceed 10% of AGI floor

Yes, 10% AGI floor reduced to 7.5% for 2017 and 2018

State and local taxes

Yes, income (or sales) tax, real property tax, personal property tax

Yes, limited to $10,000 ($5,000 for married filing separately)

Home mortgage interest

Yes, limited to $1,000,000 ($100,000 for home equity loan), one-half those amounts for married filing separately

Yes, limited to $750,000 ($375,000 for married filing separately), no home equity loan; the $1,000,000/$500,000 limit still applies to debt incurred before December 16, 2017

Charitable gifts

Yes

Yes, 50% AGI limit raised to 60% for certain cash gifts

Casualty and theft losses

Yes

Federally declared disasters only

Job expenses and certain miscellaneous deductions

Yes

No

Child tax credit

Pre-existing law. The maximum child tax credit was $1,000. The child tax credit was phased out if modified adjusted gross income exceeded certain amounts. If the credit exceeded the tax liability, the child tax credit was refundable up to 15% of the amount of earned income in excess of $3,000 (the earned income threshold).

New law. The maximum child tax credit is increased to $2,000. A nonrefundable credit of $500 is available for qualifying dependents other than qualifying children. The maximum refundable amount of the credit is $1,400, indexed for inflation. The amount at which the credit begins to phase out is increased, and the earned income threshold is lowered to $2,500. The changes to the credit sunset and revert to pre-existing law after 2025.

Child Tax Credit

Pre-existing law

New law

Maximum credit

$1,000

$2,000

Non-child dependents

N/A

$500

Maximum refundable

$1,000

$1,400 indexed

Refundable earned income threshold

$3,000

$2,500

Credit phaseout threshold

Single/head of household

$75,000

$200,000

Married filing jointly

$110,000

$400,000

Married filing separately

$55,000

$200,000

Alternative minimum tax (AMT)

Under the Act, the alternative minimum tax exemptions and exemption phaseout thresholds are increased. The AMT changes sunset and revert to pre-existing law after 2025.

Alternative Minimum Tax (AMT)

Pre-existing law

New law

Maximum AMT exemption amount

$86,200 (MFJ), $55,400 (Single/HOH), $43,100 (MFS)

$109,400 (MFJ), $70,300 (Single/HOH), $54,700 (MFS)

Exemption phaseout threshold

$164,100 (MFJ), $123,100 (Single/HOH), $82,050 (MFS)

$1,000,000 (MFJ), $500,000 (Single, HOH, MFS)

26% rate applies to AMT income (AMTI) at or below this amount (28% rate applies to AMTI above this amount)

$191,500 (MFJ, Single, HOH), $95,750 (MFS)

$191,500 (MFJ, Single, HOH), $95,750 (MFS)

Kiddie tax

Instead of taxing most unearned income of children at their parents’ tax rates (as under pre-existing law), the Act taxes children’s unearned income using the trust and estate income tax brackets. This provision sunsets and reverts to pre-existing law after 2025.

Corporate tax rates

Under the Act, corporate income is taxed at a 21% rate. The corporate alternative minimum tax is repealed.

Special provisions for business income of individuals

Under the Act, an individual taxpayer can deduct 20% of domestic qualified business income (excludes compensation) from a partnership, S corporation, or sole proprietorship. The benefit of the deduction is phased out for specified service businesses with taxable income exceeding $157,500 ($315,000 for married filing jointly). The deduction is limited to the greater of (1) 50% of the W-2 wages of the taxpayer, or (2) the sum of (a) 25% of the W-2 wages of the taxpayer, plus (b) 2.5% of the unadjusted basis immediately after acquisition of all qualified property (certain depreciable property). This limit does not apply if taxable income does not exceed $157,500 ($315,000 for married filing jointly), and the limit is phased in for taxable income above those thresholds. This provision sunsets and reverts to pre-existing law after 2025.

Retirement plans

Under the Act, the contribution levels for retirement plans remain the same. However, the Act repeals the special rule permitting a recharacterization to unwind a Roth conversion.

Estate, gift, and generation-skipping transfer tax

The Act doubles the gift and estate tax basic exclusion amount and the generation-skipping transfer tax exemption to about $11,200,000 in 2018. This provision sunsets and reverts to pre-existing law after 2025.

Health insurance individual mandate

The Act eliminates the requirement that individuals must be covered by a health care plan that provides at least minimum essential coverage or pay a penalty tax (the individual shared responsibility payment) for failure to maintain the coverage. The provision is effective for months beginning after December 31, 2018.

To read the complete act, you can do so on the government’s website here.

If you have any questions, please contact us.

29
Nov

Proposed Tax Reform Legislation

Note: On November 16, 2017, the House passed its version of the Tax Cuts and Jobs Act. On that same day, the Senate Finance Committee approved its version; it can now be considered by the full Senate. If the Senate approves its version, the House and Senate would then need to reconcile the two versions.

On November 2, 2017, House Republicans released their comprehensive tax reform plan, the Tax Cuts and Jobs Act. Then, on November 9, 2017, Senate Republicans released their own plan. The two plans have much in common, but also have significant differences. Some key provisions of these tax proposals are discussed below. Of course, provisions may change as the legislation winds its way through Congress. Most provisions, if enacted, would be effective for 2018. Comparisons below are generally for 2018.

Individual income tax rates

Current law. There are seven regular income tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. House proposal. The seven tax brackets would be reduced to four: 12%, 25%, 35%, and 39.6%.

Income Bracket Thresholds
Tax Rate Single Married Filing Jointly/ Surviving Spouse Married Filing Separately Head of Household Trust/Estate
12% $0 $0 $0 $0 $0
25% $45,000 $90,000 $45,000 $67,500 $2,550
35% $200,000 $260,000 $130,000 $200,000 $9,150
39.6% $500,000 $1,000,000 $500,000 $500,000 $12,500

In addition, the benefit of the 12% rate would be recaptured by an additional tax if adjusted gross income (AGI) exceeds $1,000,000 ($1,200,000 for married filing jointly and surviving spouses).

Senate proposal. There would be seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%.

Income Bracket Thresholds
Tax Rate Single Married Filing Jointly/ Surviving Spouse Married Filing Separately Head of Household Trust/Estate
10% $0 $0 $0 $0 $0
12% $9,525 $19,050 $9,525 $13,600 N/A
22% $38,700 $77,400 $38,700 $51,800 N/A
24% $70,000 $140,000 $70,000 $70,000 $2,550
32% $160,000 $320,000 $160,000 $160,000 N/A
35% $200,000 $400,000 $200,000 $200,000 $9,150
38.5% $500,000 $1,000,000 $500,000 $500,000 $12,500

Standard deduction, itemized deductions, and personal exemptions

Current law. In general, personal (and dependency) exemptions are available for you, your spouse, and your dependents. Personal exemptions may be phased out based on the amount of your adjusted gross income.

You can generally choose to take the standard deduction or to itemize deductions. Additional standard deduction amounts are available if you are blind or age 65 or older.

Itemized deductions include deductions for medical expenses, state and local taxes, home mortgage interest, investment interest, charitable gifts, casualty and theft losses, job expenses and certain miscellaneous deductions, and other miscellaneous deductions. There is an overall limitation on itemized deductions based on the amount of your adjusted gross income.

House proposal. The standard deduction would be significantly increased, but personal and dependency exemptions would no longer be available, and additional standard deduction amounts for the blind and those over age 65 would no longer be available.

Most itemized deductions would be eliminated (or restricted).

  • The deduction for mortgage interest would still be available, but the benefit would be reduced for some individuals, and interest on home equity loans would no longer be deductible.
  • The deduction for state and local taxes would be limited to $10,000 of real property taxes (income taxes, sales taxes, and personal property taxes would not be deductible).
  • The deduction for personal casualty losses would be eliminated, except for previously granted relief for qualified victims of Hurricanes Harvey, Irma, and Maria.
  • The charitable deduction would still be available but modified.
    Senate proposal. The standard deduction would be significantly increased, and the additional standard deduction amounts for those over age 65 or blind would still be available. The personal and dependency exemptions would no longer be available.
    Most itemized deductions would be eliminated (or restricted).
  • The deduction for mortgage interest would still be available, but not for home equity loans.
  • The deduction for all state and local taxes would be eliminated.
  • The deduction for personal casualty losses would be eliminated unless the loss was incurred in a federally declared disaster.
  • The charitable deduction would still be available but modified.
    The standard deduction, itemized deductions, and personal exemptions
Personal and Dependency Exemptions (you, your spouse, and dependents)
Current law House proposal Senate proposal
Exemption $4,150 No personal exemption No personal exemption
Standard Deduction
Current law House proposal Senate proposal
Married filing jointly $13,000 $24,400 $24,000
Head of household $9,550 $18,300 $18,000
Single/married filing separately $6,500 $12,200 $12,000
Additional aged/blind
Single/head of household $1,550 Not available $1,550
All other filing statuses $1,250 Not available $1,250
Itemized Deductions
Current law House proposal Senate proposal
Medical expenses Yes No No
State and local taxes Yes, income (or sales) tax, real property tax, personal property tax $10,000 of real property tax only No
Home mortgage interest Yes, limited to $1,000,000 ($100,000 for home equity loan) Yes, limited to $500,000, principal residence only, and no home equity loan Yes, but no home equity loan
Investment interest Yes No No
Charitable gifts Yes Yes, 50% AGI limit raised to 60% for certain cash gifts Yes, 50% AGI limit raised to 60% for certain cash gifts
Casualty and theft losses Yes No, but continued relief for qualified victims of Hurricanes Harvey, Irma, and Maria Federally declared disasters only
Job expenses and certain miscellaneous deductions Yes No No
Other miscellaneous deductions Yes No No

Child tax credit and new family tax credit

Current law. The maximum child tax credit is $1,000. The child tax credit is phased out if modified adjusted gross income exceeds certain amounts. If the credit exceeds the tax liability, the child tax credit is refundable up to 15% of the amount of earned income in excess of $3,000 (the earned income threshold).

House proposal. The maximum child tax credit would be increased to $1,600. A credit of $300 would be available for non-child dependents. In addition, a family flexibility credit of $300 would be available for a qualifying individual who is neither a child nor a non-child dependent. The maximum refundable amount of the credit would be $1,000, indexed for inflation. The amount at which the credit begins to phase out would be increased.

Senate proposal. The maximum child tax credit would be increased to $2,000. A nonrefundable credit of $500 would be available for non-child dependents. The maximum refundable amount of the credit would be $1,000, indexed for inflation. The amount at which the credit begins to phase out would be increased, and the earned income threshold would be lowered to $2,500.

Child Tax Credit
Current law House proposal Senate proposal
Maximum credit $1,000 $1,600 $2,000
Non-child dependents N/A $300 $500
Family flexibility N/A $300 N/A
Maximum refundable $1,000 $1,000 indexed $1,000 indexed
The refundable earned income threshold $3,000 $3,000 $2,500
Credit phaseout threshold
Single/head of household $75,000 $115,000 $500,000
Married filing jointly $110,000 $230,000 $500,000
Married filing separately $55,000 $115,000 $500,000

Alternative minimum tax

Under both the House and Senate plans, the alternative minimum tax would be eliminated.

Kiddie tax

Instead of taxing most unearned income of children at their parents’ tax rates, both the House and Senate plans would tax children’s unearned income using the trust and estate income tax brackets.

Corporate tax rates

Under both the House and Senate plans, corporate income would be taxed at a 20% rate. The House plan would make this effective starting in 2018. The Senate plan, however, would delay implementation to 2019.

Special provisions for business income of individuals

House proposal. A portion of the net income distributed by a pass-through entity (e.g., a partnership or S corporation) to an owner or shareholder would be taxed at a maximum rate of 25%. Wages and payments for services would be taxed at ordinary individual income tax rates.

Senate proposal. An individual taxpayer would be able to deduct 17.4% of domestic qualified business income (excludes compensation) from a partnership, S corporation, or sole proprietorship. The benefit of the deduction would be phased out for specified service businesses with taxable income exceeding $250,000 ($500,000 for married filing jointly). The deduction would be limited to 50% of the W-2 wages of the taxpayer. The W-2 wage limit would not apply if taxable income does not exceed $250,000 ($500,000 for married filing jointly), and the limit would be phased in for taxable income above those thresholds.

Retirement plans

Under both the House and Senate plans, the contribution levels for retirement plans would remain the same. However, it would no longer be permissible to recharacterize (or undo) a contribution or conversion to a Roth IRA.

Estate, gift, and generation-skipping transfer tax

House proposal. The gift and estate tax basic exclusion amount would be doubled to about $11,200,000 in 2018.

In 2025, the estate tax and the generation-skipping transfer tax would be repealed. In general, income tax basis would continue to be stepped-up (or stepped-down) to fair market value at death. The gift tax would remain, but the top gift tax rate would be reduced from 40% to 35%.

Senate proposal. The gift and estate tax basic exclusion amount would be doubled to about $11,200,000 in 2018.

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

November 29, 2017, Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017