Tax Reform Highlights – Individual Provisions

Tax Reforms for IndividualsAlthough some have criticized the process, priorities, and policies used in the formulation of this major tax system overhaul, we in the tax and accounting industry anticipated action. After several iterations, we finally got our wish for something—anything—in concrete so that we could get tax plans in place before year end and have answers to the many questions that our clients are asking about what tax reform does to their 2018 tax bill.

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act, a 1,101- page document into law.

 

IRS


Final Individual Provisions in Tax Cuts and Jobs Act of 2017.

Here is a comparison chart that briefly summarizes the major provisions affecting our individual client.

 

INDIVIDUAL PROVISIONS TAX CUTS AND JOBS ACT OF 2017
Effective The individual changes are generally effective for tax years beginning after 12/31/17 and before 1/1/2026.

  • Thus, the wording is “suspends” rather than “repeals”.
Individual tax rates 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

  • Highest rate applies at taxable income of $600,000 MFJ and $500,000 single and HOH.
  • Marriage penalty imposed at highest brackets.
Trust tax rates 10%, 24%, 35%, and 37%
Kiddie tax The unearned income of a child is taxed at trust rates, rather than the tax rates applicable to the parents.
Exemptions Suspends the deduction for exemptions to 2026.
Child tax credit The child tax credit is increased to $2,000 ($1,400 refundable) for qualifying children under 17. A $500 credit is added for other dependents.

  • No credit is allowed unless the SSN of child is provided—­ITINs are no longer accepted.
  • The phase-out is increased to begin at $400,000 MFJ and $200,000 single and HOH (was $75,000 and $110,000)—phase-­out numbers are not indexed for inflation.
Capital gains Zero, 15%, 20%, 25%, and 28% rates are retained.

  • The zero rate applies up to taxable income of $77,200 MFJ, $51,700 HOH, and $38,600 single (2018).
  • Basis rules retained (FIFO proposal dropped).

Retains current rules for §121 home sale exclusion.

Adjustments— moving expense deduction Suspends the moving expense deduction except for military moves. There is a corresponding provision that makes moving expense reimbursement taxable.
Adjustment —alimony deduction Suspends the alimony paid deduction for agreements executed after Dec. 31, 2018. There is a corresponding repeal of the provisions providing inclusion of alimony in gross income.
Adjustment —teacher deduction Retains teacher deduction at $250.
Standard deduction Increases standard deduction to $12,000 single, $18,000 for HOH, and $24,000 MFJ.
Itemized deductions Suspends the phase-out of itemized deductions.
Medical deduction Allows medical expenses in excess of 7.5% of AGI for 2017 and 2018. Removes AMT preference between 7.5% and 10% for 2017 and 2018.
State and local taxes Suspends all Schedule A individual state and local tax, sales tax, and property tax deductions above $10,000.

  • Bill specifically prohibits deduction for prepaid 2018 state income taxes.
Mortgage interest Reduces acquisition debt from $1,000,000 to $750,000 for debt incurred after 12/15/17.

Suspends equity debt interest deduction.

Charitable contributions Increases the 50% AGI limitation on cash contributions to public charities and certain private foundations to 60%.

Suspends a charity deduction for amounts paid for college athletic seating rights.

Misc. itemized deductions Suspends all misc. itemized deductions that are subject to the 2% of AGI limitation, including employee business expenses, tax prep fees, investment advisor fees, legal fees, etc.
Misc. itemized deductions Suspends personal casualty loss deductions except for presidentially declared casualty losses.

Gambling losses are limited to gambling winnings for professional gamblers.

AMT Retains AMT but increases the exemption amount to $109,400 MFJ, $70,300 single and HOH. Phase-out of exemption increased to $1,000,000 MFJ and $500,000 single and HOH.
Adoption credit Retains as in current law.
Earned income credit Retains as in current law.
Education Allows a qualified distribution for K-12 school expenses up to $10,000 from a 529 tuition savings plan.

Retains student loan interest deduction, US savings bond exclusion, and tuition waiver exclusion.

ABLE The beneficiary can contribute up to the lesser of federal poverty level or beneficiary’s earned income.
Retirement—IRA
recharacterization
Suspends recharacterization rule.
Retirement— Loan default If the taxpayer defaults on a pension plan loan, a deemed distribution occurs. The taxpayer can rollover the deemed distribution amount into an IRA by the extended due date of the return (was 60 days).
Estate taxes The estate, gift, and generation skipping tax exemption amounts are doubled. Estate tax is not repealed. Step up in basis is retained.

  • $11,200,000 (2018)
ACA The individual mandate penalty is reduced to zero after 2018. The 3.8% tax on net investment income (NII) and 0.9% additional Medicare tax are retained.

 

 

Definitions

ABLE Achieving a Better Life Experience
ACA Affordable Care Act
AGI Adjusted Gross Income
AMT Alternative Minimum Tax
ESPP Employee Stock Purchase Plan
FIFO First in, first out
HOH Head of Household
IRA Individual Retirement Account
ISO Incentive Stock Options
ITIN Individual Taxpayer Identification Number
MFJ Married Filing Jointly
NOL Net Operating Loss
NQ Non-qualified
PFIC Passive Foreign Investment Company
PSC Personal Service Corporation
REIT Real Estate Investment Trust
RSU Restricted Stock Units
SE Self-employment
SSN Social Security Number
UNICAP Uniform Capitalization
W-2 Form W-2, a United States federal tax form issued by employers and stating how much an employee was paid in a year.

 

 

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