Tax Cuts and Jobs Act: Top 10 Takeaways for Individuals
The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and introduces a host of changes to the nation’s tax laws. While it will likely take months for the Treasury Department to adapt to the new law and more changes could be coming, it’s important that we share our understanding of potential impacts on your financial well-being as they stand today.
1. Income tax rates are lower, and the seven tax brackets have been adjusted favorably.
- Under the old law, a married filing jointly (MFJ) taxpayer with taxable income of $200,000 fell within the 28% marginal tax bracket, and a MFJ taxpayer with $300,000 of income fell within the 33% bracket.
- Under the new law, both taxpayers fall within the 24% marginal bracket, a 4% and 9% improvement respectively. While the highest income tax bracket has been reduced from 39.6% to 37%, the level of taxable income to which the top bracket applies has been increased from $480,000 to $600,000.
2. Changes to deductions, exemptions and credits may have both positive and negative impacts on taxpayers.
- The standard deduction has been nearly doubled to $12,000 (S) or $24,000 (MFJ).
- The child (<17 years) tax credit has been doubled to $2,000, and the level at which this credit begins to phase out has been increased significantly to $400,000 of adjusted gross income (AGI) (MFJ).
- Education assistance in the workplace is still excludable from income up to $5,250.
- Personal exemptions (i.e., $4,050 for you, your spouse, dependent children) have been eliminated.
- The deduction for state and local income and property taxes has been capped at $10,000.
- The mortgage interest deduction has been reduced to $750,000 in loan value, and the interest on home equity indebtedness has been eliminated.
- The medical expense deduction threshold has been reduced to 7.5% of AGI for 2017 and 2018.
3. Many miscellaneous deductions have been eliminated.
- Miscellaneous deductions subject to the 2% of AGI floor (such as investment advisory fees) have been repealed.
- Casualty losses are eliminated, except for those caused by federally declared disasters.
- Except for military personnel, moving expenses cannot be deducted.
- For divorce decrees beginning in 2019, alimony payments are neither deductible by the payor nor recognized as income by the payee.
4. The 3.8% net investment income tax (Medicare surtax) has been retained.
This tax on dividends, interest, rents and royalties applies to taxpayers with modified adjusted gross income in excess of $200,000 (S) and $250,000 (MFJ). The 0.9% Medicare surtax on earned income in excess of the $200,000/$250,000 levels has also been retained.
5. To Roth or not to Roth?
For years after 2017, you can no longer recharacterize a Roth IRA conversion, although conversions completed in 2017 can be recharacterized. Also, the “backdoor” strategy of funding a nondeductible IRA and completing a subsequent conversion still applies.
6. Charitable contribution limits increased.
The current year deductibility of cash given to a public charity has been increased from 50% of AGI to 60%. As before, excess deductions are carried forward for five years to be used against the same AGI limits. Higher current deduction limits should accelerate deductions and savings associated with large gifts.
7. The alternative minimum tax (AMT) has been retained.
AMT exemptions have been increased by about 40% to $70,300 (S) or $109,400 (MFJ), and their phaseout levels have been bumped up considerably to $500,000/$1,000,000. With many itemized deductions being limited under the new tax reform, AMT should no longer have unintended negative effects on middle-income taxpayers.
8. Estate, gift and generation-skipping tax exemptions have doubled.
These transfer tax exemptions are now $11,200,000 (S) or $22,400,000 (MFJ), and indexed for inflation going forward. Moreover, assets included in a decedent’s estate are still entitled to a step-up in basis to their fair market value. Although these provisions are scheduled to expire in 2025 and recede to the previous law’s levels, history has shown that these exclusions have historically gone up instead of down. If you want to be on the safe side, look at strategies that lock in the higher exclusion levels.
9. 529 plans have expanded.
These popular, flexible and tax-advantaged plans for college savings can now be used for up to $10,000 per year in qualified educational expenses for elementary and high school.
10. The Pease limitation has been eliminated.
Under prior law, this limitation could wipe out 80% of itemized deductions for a taxpayer in a successful year or a year in which he/she sold a business, particularly in states with income taxes. However, its elimination may have been balanced by other limitations on itemized deductions.