Highlights of the Tax Cuts and Jobs Act.
Changes Affecting Individuals
New Income Tax Rates & Brackets. For tax years 2018 through 2025, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The tax rates for estates and trusts are: 10%, 24%, 35%, and 37%. An individual reaches the highest tax rate at taxable income of $500,000 ($600,000 for joint filers). Estates and trusts continue to reach the highest rate at $12,500 of taxable income.
Standard Deduction Increased. For tax years 2018 through 2025, the standard deduction is $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers. These amounts are adjusted for inflation in tax years beginning after 2018.
Personal Exemptions Suspended. For tax years 2018 through 2025, the deduction for personal exemptions is zero.
Capital Gains. The Act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-Act law, but indexes them for inflation using C-CPI-U in tax years after Dec. 31, 2017. For 2018, the point at which capital gains are taxed at 20% is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.
Partnership Carried Interests. Effective in 2018, the Act imposes a 3-year holding period for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer’s gain will be treated as short-term gain taxed at ordinary income rates.
Business Loss Limitation. For tax years 2018 through 2025, the Act provides that business losses in excess of $250,000 are not allowed for the tax year but are instead treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after consideration of the passive loss rules.
Personal Casualty & Theft Losses. For tax years 2018 through 2025, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster. However, personal casualty gains are still taxable.
Child Tax Credit Increased. For tax years 2018 through 2025, the child tax credit is increased to $2,000. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) These amounts are not indexed for inflation. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.
State and Local Taxes. For tax years 2018 through 2025, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (i) state and local property taxes not paid or accrued in a business or investment activity; and (ii) state and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, and other taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted. However, property, sales, and income taxes incurred in a business or investment activity remain fully deductible without limitation.
To prevent taxpayers from prepaying income taxes, the Act provides that prepayments of 2018 income taxes in 2017 are not deductible in 2017, but only in 2018. This limitation is not applicable to property taxes
Mortgage & Home Equity Indebtedness Interest Deduction. For tax years 2018 through 2025, the deduction for interest on home equity indebtedness is not allowed and the deduction for mortgage interest is limited to debt of up to $750,000 ($375,000 for married taxpayers filing separately). For tax years after 2025, the prior $1 million/$500,000 limitations are restored, and a taxpayer may treat indebtedness up to these amounts as acquisition indebtedness regardless of when it was incurred.
The new law does not apply to any debt incurred before Dec. 15, 2017. A taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017.
The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence debt that was incurred before Dec. 15, 2017, as long as the indebtedness resulting from the refinancing does not exceed the amount of the refinanced debt.
New Medical Expense Deduction Threshold. For tax years 2017 through 2018, the threshold for medical expense deductions is reduced to 7.5% for all taxpayers. In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI does not apply for these years.
Charitable Contribution Deduction Limit. For contributions made in 2018 through 2025, the 50% of adjusted gross income limit for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation may be carried forward and deducted for up to five years, subject to the later years’ ceilings.
Alimony. For any divorce or separation agreement executed after 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.
Miscellaneous Itemized Deductions. For tax years 2018 through 2025, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. The overall 3% limitation on itemized deductions is also suspended.
Moving Expenses. For tax years 2018 through 2025, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. Likewise, moving expenses reimbursed by an employer are no longer excluded from the employee’s income, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station.
Repeal of Mandatory Health Insurance. The Affordable Care Act (also called Obamacare) required that individuals who were not covered by a health plan that provided at least minimum essential coverage were required to pay a “shared responsibility payment” (also referred to as a penalty) with their federal tax return. Unless an exception applied, the penalty tax was imposed for any month that an individual did not have minimum essential coverage. For months after Dec. 31, 2018, the Tax Cuts and Jobs Act permanently eliminated that requirement.
Higher AMT Exemption Amounts. For tax years 2018 through 2025, the Act increases the AMT exemption amounts for individuals to $109,400 (joint filers and surviving spouses), $70,300 (single taxpayers), $54,700 (married filing separately) and $22,500 (estates and trusts). These exemption amounts are reduced to the extent a taxpayer’s alternative minimum taxable income exceeds $1 million for joint filers and surviving spouses, $75,000 for estates and trusts, and $500,000 for all other filers.