On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). This sweeping tax package drastically changes the way you calculate your federal taxes. From lower tax rates to a new deduction for qualified business income, the TCJA brings a host of provisions that will impact your tax situation. This letter summarizes what we think are the key points in the TCJA. We have organized our discussion according to questions already asked by clients. Should you have additional questions, please don’t hesitate to contact us.
Will the TCJA Affect My 2017 Tax Return?
For the most part, no. Most of the individual tax changes apply to tax years 2018–2025. However, there are a few provisions that may affect your 2017 return. For example, you can deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income. Prior to the TCJA, this limit was 10%. Also, if you own a business, you may be able to claim a 100% first-year bonus depreciation deduction for qualified assets acquired and placed in service after 9/27/17. Don’t worry—I’ll see if any of these provisions apply to you.
Will My Tax Bill Increase?
It depends. Thanks to the TCJA, 2018 tax rates are generally lower than those for 2017. For example, the top rate has been reduced from 39.6% to 37%. Also, the top rate now applies to joint filers whose taxable income is over $600,000 (as opposed to $470,700 for 2017). The standard deduction is also different. For 2018, joint filers can enjoy a standard deduction of $24,000 (versus $12,700 for 2017). The new standard deduction for heads of household is $18,000, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,000. However, the TCJA suspends the deduction for personal exemptions.
If you typically claim the standard deduction (as opposed to itemizing deductions), chances are your tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit (see later discussion), will mean more cash in your pocket. However, if you usually itemize deductions, the larger standard deduction may change this. Also, the TCJA eliminates or limits many of the itemized deductions. The bottom line is that your circumstances will determine if you will pay more or less under the TCJA. We are here to help with that.
Note: If you have a child or young adult with unearned income (income other than wages) over a certain amount, he or she may be subject to the Kiddie Tax. For 2018–2025, the TCJA taxes a kid’s unearned income at rates paid by trusts and estates, which can be as high as 37%. Prior to the TCJA, such income was taxed at the parent’s marginal rate, which could be as high as 39.6%.
Did My Favorite Deduction or Credit Go Away?
Possibly. The TCJA alters the rules for many of our favorite tax deductions and credits. Here are some of the more notable changes:
· Mortgage Interest. Prior to the TCJA, you could deduct interest on up to $1 million ($500,000 if married filing separately) of mortgage debt. You also could deduct interest on up to $100,000 ($50,000 if married filing separately) of home equity debt. The TCJA lowers the $1 million limit to $750,000 ($375,000 if married filing separately). Unfortunately, the TCJA eliminates the deduction for interest on home equity debt.
· State and Local Taxes. Starting in 2018, the deduction for state and local income and property taxes is limited to $10,000 ($5,000 if married filing separately).
· Alimony. For divorce or separation agreements entered into after 2018, alimony payments aren’t deductible. However, the receiving spouse isn’t required to include the payments in income.
· Moving Expenses. The TCJA eliminates the deduction for job-related moving expenses, except for active duty military personnel.
· Casualty and Theft Losses. The deduction for casualty and theft losses has been suspended. However, a deduction may be available for losses incurred in a federally declared disaster.
· Miscellaneous Itemized Deductions. These included tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses. Unfortunately, a deduction for these items is no longer available.
· Child Tax Credit. In a bit of good news, the TCJA increases the child tax credit from $1,000 to $2,000 per qualifying child under the age of 17. It also introduces a new nonrefundable $500 credit for nonchild dependents. The income levels at which the credit begins to be phased out has been increased as well.
Is the Alternative Minimum Tax (AMT) Still Around?
Yes, the TCJA retains the AMT for individuals. However, the exemption has been increased to $109,400 for joint filers ($54,700 if married filing separately) and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with AMT income over $1 million for joint filers ($500,000 for all others).
What Is This New Pass-through Deduction?
You may have heard a lot of talk in the news about a new deduction for “pass-through” income, but it’s actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities such as partnerships, LLCs, and S corporations. Under the TCJA, individuals may deduct up to 20% of their qualified business income; however, the deduction is subject to various rules and limitations. We can help determine your eligibility for this new deduction.
Is It True “Obamacare” Was Repealed?
Kind of. The Affordable Care Act (ACA—referred to by some as “Obamacare”) required individuals who weren’t covered by a health plan that provided at least minimum essential coverage to pay a “shared responsibility payment.” Starting in 2019, the TCJA permanently reduces the shared responsibility payment to zero. However, for 2017 and 2018, the ACA’s legislative provisions are still in force, and taxpayers are obligated to follow the law and pay any amounts owed.
Has the Estate Tax Been Repealed?
No, the TCJA retains the estate tax. However, the estate tax exemption has been increased from $5.49 million in 2017 to roughly $11.2 million in 2018 ($22.4 million for married couples). This means that less estates will be subject to the tax.
As you can see, the TCJA touches many areas, and this letter only scratches the surface of all the new rules. Please call me if you have questions or want more information.