2017 Tax Reform
Individual Tax Changes in the “Tax Cuts and Jobs Act”
On December 22, President Trump signed into law the “Tax Cuts and Jobs Act”, a sweeping tax reform law that will entirely change the tax landscape. This article describes the Act's changes that will affect individuals, including the new rates and brackets, the increased standard deduction and elimination of personal exemptions, and the repeal of the individual mandate under the Affordable Care Act. It is not a complete list; it is however the ones that I thought would be of the most interest to most of you.-----Happy Reading
New Income Tax Rates & Brackets
The Tax Code provides four tax rate schedules for individuals based on filing status;
- Single
- Married filing jointly/surviving spouse
- Married filing separately
- Head of household
Each of these statuses is divided into income ranges which are taxed at progressively higher marginal tax rates as income increases. Prior law individuals were subject to six tax rates.The New Tax Law has seven tax rates that apply to the individual taxpayer beginning after
December 31, 2017.The brackets are as follows:
- 10%
- 12%
- 22%
- 24%
- 32%
- 35%
- 37%
The Act also provides four tax rates for estates and trusts:
- 10%,
- 24%,
- 35%,
- 37%.
Standard Deduction Increased
New Law. For tax years beginning after December. 31, 2017 and before January 1, 2026, the standard deduction is increased to
- $24,000 for married individuals filing a joint return,
- $18,000 for head-of-household filers, and
- $12,000 for all other taxpayers,
adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.
Personal Exemptions Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.
Withholding rules. The Conference Agreement specifies that IRS may administer the withholding rules under for tax years beginning before January. 1, 2019 without regard to the above amendments—i.e., wage withholding rules may remain the same as present law for 2018.
New Measure of Inflation Provided
New Law. For tax years beginning after December. 31, 2017 (December. 31, 2018 for figures that are newly provided under the Act for 2018 and thus won't be reset until after that year, dollar amounts that were previously indexed using CPI-U will instead be indexed using chained. This change, unlike many provisions in the Act, is permanent.
Kiddie Tax Modified
Under pre-Act law, the “kiddie tax” provisions, the net unearned income of a child was taxed at the parents' tax rates if the parents' tax rates was higher than the tax rates of the child. The remainder of a child's taxable income (i.e., earned income, plus unearned income up to $2,100 (for 2018), less the child's standard deduction) was taxed at the child's rates. The kiddie tax applied to a child if: (1) the child had not reached the age of 19 by the close of the tax year, or the child was a full-time student under the age of 24, and either of the child's parents was alive at such time; (2) the child's unearned income exceeded $2,100 (for 2018); and (3) the child did not file a joint return.
New Law. For tax years beginning after December 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates (see above). This rule applies to the child's ordinary income and his or her income taxed at preferential rates.
Capital Gains Provisions Conformed
The adjusted net capital gain of a non-corporate taxpayer (e.g., an individual) is taxed at maximum rates of
- 0%,
- 15%,
- 20%.
New Law. The Act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-Act
For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for trusts and estates, and $38,600 for other unmarried individuals. The 20% breakpoint 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.
LOSS PROVISIONS
New Limitations on “Excess Business Loss”
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the Act provides that the excess farm loss limitation doesn't apply, and instead a non-corporate taxpayer's “excess business loss” is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the passive loss rules described above.
An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation.
In the case of a partnership or S corporation, the provision applies at the partner or shareholder level. Each partner's or S corporation shareholder's share of items of income, gain, deduction, or loss of the partnership or S corporation is taken into account in applying the above limitation for the tax year of the partner or S corporation shareholder; and regulatory authority is provided to apply the new provision to any other pass-through entity to the extent necessary, as well as to require any additional reporting as IRS determines is appropriate to carry out the purposes of the provision.
Deduction for Personal Casualty & Theft Losses Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster. However, where a taxpayer has personal casualty gains, the loss suspension doesn't apply to the extent that such loss doesn't exceed the gain.
Gambling Loss Limitation Modified
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the limitation on wagering losses under is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.
CHANGES TO TAX CREDITS
Child Tax Credit Increased
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refund ability during this same period, as outlined below.
Phase-out. 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) (it is not indexed for inflation). Non-child dependents. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.
Refund ability. The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.SSN required. No credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's SSN.
MODIFIED DEDUCTIONS & EXCLUSIONS
State and Local Tax Deduction Limited
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, subject to the exception described below, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity described in generally, for the production of income). State and local income, war profits, and excess profits are not allowable as a deduction.
However, 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 carrying on a trade or business or activity described in and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted.
Prepayment provision. For tax years beginning after December 31, 2016, in the case of an amount paid in a tax year beginning before January 1, 2018 with respect to a State or local income tax imposed for a tax year beginning after December 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is so imposed for purposes of applying the above limits. In other words, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017 can't claim an itemized deduction in 2017 for that prepaid income tax.
Mortgage & Home Equity Indebtedness Interest Deduction Limited
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). For tax years after December 31, 2025, the prior $1 million/$500,000 limitations are restored, and a taxpayer may treat up to these amounts as acquisition indebtedness regardless of when the indebtedness was incurred. The suspension for home equity indebtedness also ends for tax years beginning after December 31, 2025.
Treatment of indebtedness incurred on or before December 15, 2017. The new lower limit doesn't apply to any acquisition indebtedness incurred before December 15, 2017.
“Binding contract” exception. A taxpayer who has entered into a binding written contract before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to December 15, 2017.
Refinancing. The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before December 15, 2017, so long as the indebtedness resulting from the refinancing doesn't exceed the amount of the refinanced indebtedness.
Medical Expense Deduction Threshold Temporarily Reduced
New Law. For tax years beginning after December 31, 2016 and ending before January 1, 2019, the threshold on 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 doesn't apply to tax years beginning after December 31, 2016 and ending before January 1, 2019.
Charitable Contribution Deduction Limitation Increased
New Law. For contributions made in tax years beginning after December 31, 2017 and before January 1, 2026, the 50% limitation under for cash contributions to public charities and certain private foundations is increased to 60%., Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year's ceiling.
And, for contributions made in tax years beginning after December 31, 2016, the, provision—i.e., the donee-reporting exemption from the CWA requirement—is repealed.
No Deduction For Amounts Paid For College Athletic Seating Rights
New Law. For contributions made in tax years beginning after December 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
Alimony Deduction by Payor/Inclusion by Payee Suspended
New Law. For any divorce or separation agreement executed after December 31, 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. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.
Miscellaneous Itemized Deductions Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended.
Overall Limitation (“Pease” Limitation) on Itemized Deductions Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the “Pease limitation” on itemized deductions is suspended
Qualified Bicycle Commuting Exclusion Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the exclusion from gross income and wages for qualified bicycle commuting reimbursements is suspended
Exclusion for Moving Expense Reimbursements Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the exclusion for qualified moving expense reimbursements is suspended, 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.
Moving Expenses Deduction Suspended
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, 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.
HEALTHCARE PROVISIONS
Repeal of Obamacare Individual Mandate
New Law. For months beginning after December 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. This repeal is permanent.
ALTERNATIVE MINIMUM TAX (AMT)
AMT Retained, with Higher Exemption Amounts
New Law. For tax years beginning after December 31, 2017 and before January 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:
- . . . For joint returns and surviving spouses, $109,400.
- . . . For single taxpayers, $70,300.
- . . . For marrieds filing separately, $54,700.
Under the Act, the above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the AMTI of the taxpayer exceeds the phase-out amounts, increased as follows:
EDUCATION PROVISIONS
ABLE Account Changes
New Law. Effective for tax years beginning after December 22, 2017, and before January 1, 2026, the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual's compensation for the tax year.
Saver's credit eligible. Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under for contributions made to his or her ABLE account.
Recordkeeping requirements. The Act also requires that a designated beneficiary (or person acting on the beneficiary's behalf) maintain adequate records for ensuring compliance with the above limitations.
For distributions after December 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts; see below) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family., Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
Expanded Use of 529 Account Funds
“Qualified higher education expenses” included tuition, fees, books, supplies, and required equipment, as well as reasonable room and board if the student was enrolled at least half-time. Eligible schools included colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This included nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions.
New Law. For distributions after December 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
Student Loan Discharged on Death or Disability
New Law. For discharges of indebtedness after December 31, 2017 and before January 1, 2026, certain student loans that are discharged on account of death or total and permanent disability of the student are also excluded from gross income.
DISASTER RELIEF PROVISIONS
2016 “Net Disaster Loss” Relief Available to Non-Itemizers & Taxpayers Subject to AMT
New Law. Effective for tax years beginning after December 31, 2017, and before January 1, 2026, if an individual has a net disaster loss (defined below) for any tax year beginning after December 31, 2017, and before January 1, 2026, the standard deduction is increased by the net disaster loss.
The Act also provides that, if any individual has a net disaster loss for any tax year beginning after December 31, 2017 and before January 1, 2026, the AMT adjustment for the standard deduction doesn't apply to the increase in the standard deduction that is attributable to the net disaster loss.
Net disaster loss. A net disaster loss is the excess of (i) qualified disaster-related personal casualty losses, over (ii) personal casualty gains. “Qualified disaster-related personal casualty losses” are those described in that arise in a 2016 disaster area (below). Personal casualty gains are those described in
2016 disaster area. The Act provides tax relief relating to any “2016 disaster area,” which means any area with respect to which a major disaster was declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016. (Act Sec. 11028(a))
Raised Casualty Floor & Modified Threshold for 2016 Disaster Losses
New Law. For tax years beginning after December 31, 2017, and before January 1, 2026, the Act provides that if an individual has a net disaster loss (for this purpose, the definition above applies except that the timeframe is changed to any tax year beginning after December 31, 2015 and before January, 1, 2018), (i) the $100-per-casualty floor is increased to $500 and (ii) the 10%-of-AGI threshold doesn't apply.
Relief from Early Withdrawal Tax for “Qualified 2016 Disaster Distributions”
New Law. The Act provides an exception to the retirement plan 10% early withdrawal tax for up to $100,000 of “qualified 2016 disaster distributions.” These distributions are defined as distributions from an eligible retirement plan made (a) on or after January 1, 2016, and before January 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area and who has sustained an economic loss by reason of the events that gave rise to the Presidential disaster declaration. An “eligible retirement plan” means a qualified retirement plan, a section 403(b) plan or an IRA.
Income attributable to a qualified 2016 disaster distribution can, under the Act, be included in income ratably over three years, and the amount of a qualified 2016 disaster distribution can be recontributed to an eligible retirement plan within three years.
The Act also provides that a plan amendment made pursuant to the above disaster relief provisions may be retroactively effective if certain requirements are met, including that it be made on or before the last day of the first plan year beginning after December 31, 2018 (December 31, 2020 for a governmental plan), or a later date prescribed by IRS.
ESTATE & GIFT TAX
Estate and Gift Tax Retained, with Increased Exemption Amount
New Law. For estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in
IRS PRACTICE & PROCEDURAL CHANGES
Time To Contest IRS Levy Extended
IRS is authorized to return property that has been wrongfully levied upon. Under pre-Act law, monetary proceeds from the sale of levied property could generally be returned within nine months of the date of the levy.
New Law. For levies made after December 22, 2017; and for levies made on or before December 22, 2017, if the 9-month period has not expired as of December 22, 2017, the 9-month period during which IRS may return the monetary proceeds from the sale of property that has been wrongfully levied upon is extended to two years. The period for bringing a civil action for wrongful levy is similarly extended from nine months to two years.