How the 2017 Tax Act Affects Your Income Tax Return
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (P.L. 115-97) was signed into law (the “Act”). The Act represents the most sweeping tax legislation since the Tax Reform Act of 1986 and will affect every individual, business owner, and corporate tax payer in the U.S.
The Act contains significant changes for individual tax payers, most of which take effect for 2018 and expire after 2025. Some of the notable individual tax changes are discussed below:
- Tax Brackets. The Act maintains seven income tax brackets but temporarily adjusts the tax rates as follows:
|10 percent||10 percent|
|15 percent||12 percent|
|25 percent||22 percent|
|28 percent||24 percent|
|33 percent||32 percent|
|35 percent||35 percent|
|39.6 percent||37 percent|
The top rates for 2017, which currently apply at $418,400 of taxable income for single filers ($470,700 for joint filers), will now take effect at $500,000 and $600,000 respectively and will continue to be adjusted for inflation.
- Personal Exemptions and Standard Deduction. For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. If a filer chooses not to itemize deductions, they can also take a standard deduction based on their filing status. For 2018–2025, the Act suspends personal exemptions and roughly doubles the standard deduction amounts. The standard deduction amounts will be adjusted for inflation beginning in 2019.
|Personal Exemption||$4,050 for tax payer, spouses, and any dependents||Suspended|
|Standard Deduction||$6,350-singles and separate filers
$9,350 for head of household filers
$12,700 for married couples filing jointly.
|$12,000 for singles and separate filers
$18,000 for heads of households
$24,000 for married couples filing jointly.
The increased standard deduction may compensate for the elimination of the personal exemptions and perhaps even provide some additional tax savings for some taxpayers. However, for those with several dependents or who itemize deductions, these changes might result in a higher tax bill.
- Inflation Adjustments. Under the Act, annual inflation adjustments will be calculated on a permanent basis using the chained consumer price index (known as C-CPI-U). This index will increase tax bracket thresholds, the standard deduction, and certain exemptions at a slower rate than with the consumer price index used under the prior law. This will have the effect of pushing taxpayers into higher tax brackets and making various breaks worth less over time.
- Estate Tax. The Act doubles the estate tax exemption to $10 million for 2018–2025. The exemption is adjusted for inflation and is expected to be $11.2 million for 2018. Because the exemption doubling is only temporary, taxpayers with assets in the $5 million to $11 million range (twice that for married couples) still need to keep estate taxes in mind in their planning.
- Mortgage Interest Deduction. The Act tightens limits on the itemized deduction for home mortgage interest. For 2018–2025, it generally allows a taxpayer to deduct interest only on mortgage debt of up to $750,000, if acquired on or after December 16, 2017. The limit remains at $1 million for mortgage debt incurred before Dec. 16, 2017. The Act suspends the deduction for interest on home equity debt or 2018–2025. Taxpayers cannot claim deductions for such home equity debt interest at all, regardless of when the debt was incurred or how it is used.
- State and Local Tax Deduction. For 2018–2025, taxpayers can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and either income or sales taxes if itemizing deductions.
- Family Tax Credits. The Act doubles the credit to $2,000 per child under age 17 beginning in 2018. The maximum amount refundable is limited to $1,400 per child. Under the new law, the credit does not begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers (compared with the 2017 phaseouts of $110,000 and $75,000). The phaseout thresholds will not be indexed for inflation, though, meaning the credit will lose value over time.
The Act includes, beginning in 2018, a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child, parent, sibling, niece or nephew, or aunt or uncle).
These provisions all expire after 2025.
- Roth Conversions. Taxpayers who convert a pretax traditional IRA into a post-tax Roth IRA lose their ability to later “recharacterize” (that is, reverse) the conversion.
- Additional Deductions, Exclusions and Credits.
- Miscellaneous itemized deductions subject to the two percent floor.This deduction for expenses such as certain professional fees, investment expenses, and unreimbursed employee business expenses is suspended for 2018–2025. If you are an employee and work from home, this includes the home office deduction.
- Charitable contributions.For 2018–2025, the limit on the deduction for cash donations to public charities is raised to 60 percent of AGI from 50 percent. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated.
- Alimony payments.Alimony payments will not be deductible — and will be excluded from the recipient’s taxable income — for divorce agreements executed (or, in some cases, modified) after Dec. 31, 2018. Because the recipient spouse would typically pay income taxes at a rate lower than the paying spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.
- Medical Expense Deduction.The threshold for deducting such unreimbursed expenses is reduced from 10 percent of adjusted gross income (AGI) to 7.5 percent for all taxpayers for both regular and alternative minimum tax (AMT) purposes in 2018. The percentage will go back to 10 percent in 2019.
- Moving expenses.The deduction for work-related moving expenses is suspended for 2018–2025, except for active-duty members of the Armed Forces (and their spouses or dependents) who move because of a military order that calls for a permanent change of station. For 2018–2025, the exclusion from gross income and wages for qualified moving expense reimbursements is also suspended, again except for active-duty members of the Armed Forces who move pursuant to a military order.
- 529 Plans. 529 plan distributions can be used for elementary or secondary public, private, or religious school expenses, up to $10,000 per year per student. So even though a student may be the beneficiary of multiple accounts, only $10,000 per year can be distributed tax free for that student.
The Act leaves in place many deductions and credits, including the following:
- Principal residence gain exclusion,
- Exclusion for employer-provided adoption assistance,
- Lifetime learning credit,
- Deduction for student loan interest, and
- Deduction for graduate student tuition waivers.
As with any piece of massive legislation, many questions about implementation and impact linger unanswered. Please keep in mind these are only some of the changes in the Act, and every tax payer’s situation is different. If you would like more details about any aspect of how the new law may affect you, please contact us.