2018 Tax Changes for Individuals
The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package with lots of changes affecting every taxpayer. This article contains a summary of some of the more important elements of the new laws. We compare pretax Cuts laws to newly enacted law and unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025. After 2025, the “old” laws go back into effect.
The Standard deduction
Pre-Tax Cut Law: Currently (before the new law) the basic standard deduction was $12,700 for joint filers and surviving spouses, $9,350 for heads of household; and $6,350 for singles and marrieds filing separately. Inflation indexing. These amounts are adjusted annually for inflation.
New Tax Cut Law:Under the new law, the basic standard deduction almost doubled through 2025. For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026 the standard deduction dollar amounts are increased to:
• (a) $24,000 for joint filers and surviving spouses
• (b) $18,000 for heads of household
• (c) $12,000 for singles and marrieds filing separately
Thus, for tax years beginning after 2018, the above-described standard deduction dollar amounts are indexed for inflation using the C-CPI-U, instead of the CPI-U used under prior law.
Summary: The standard deduction is almost doubled, however there are many itemized deductions that are eliminated so how this will impact you will depend on how the other changes to the law affect you.
Pre-Tax Cut Law: Before the new law, in determining taxable income, an individual reduced adjusted gross income (AGI) by any personal exemption deductions and either by the applicable standard deduction or itemized deductions. Personal exemptions generally were allowed for a taxpayer, the taxpayer’s spouse, and any dependents. No personal exemption was allowed to a dependent if a deduction was allowed to another taxpayer.
For 2017, the (inflation-adjusted) amount deductible for each personal exemption was $4,050.
New Tax Cut Law: Under the new law, any deduction for personal exemptions is suspended – a.k.a. eliminated.
In summary: Starting in 2018 you can no longer claim personal or dependency exemptions. The deduction is gone for the tax years 2018-2025.
State and local taxes – Property taxes
Pre-Tax Cut Law: A taxpayer could deduct from their taxable income as an itemized deduction several
types of taxes paid at the state and local level, including real and personal property taxes, income taxes,
and/or sales taxes.
New Tax Law: The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018. ($5,000 for a married taxpayer filing a separate return). There is a prepayment provision that disallows a deduction in 2017 for taxes applicable to future years.
Summary: You cannot claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the $10,000 aggregate limitation. However, you can pay all taxes due for the 2017 tax year by December 31st to take advantage of the maximum deduction allowable for current taxes due.
Mortgage interest limitations
Pre-Tax Cut Law: Under the pre-Act rules, a taxpayer could deduct interest on up to a total of $1 million ($500,000 single or filing separately) of mortgage debt used to acquire your principal residence and a second home. The IRS calls this “acquisition debt”.
New Tax Cut Law: Under the new law, starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). Which means mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million).
You get a break if you were already in contract on your home before the new laws went into effect.
If a taxpayer 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 that residence before Apr. 1, 2018, is treated as having incurred acquisition indebtedness before Dec. 15, 2017 under the special rule above, and, so, may apply the $1,000,000/$500,000 limit. So for those taxpayers who were already in contract before the new law was enacted and close on your home before April 1, 2018 the new rules won’t apply to you.
The higher pre-Act limit also applies to debt from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. This means you can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt in the future and not be subject to the reduced limitation.
Summary: The aggregate amount treated as acquisition indebtedness can’t exceed $750,000 ($375,000 for marrieds filing separately). This applies to tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026.
Home equity interest deduction eliminated
Pre-Tax Cut Law: Before the changes, interest on home equity debt was deductible, i.e., debt secured by the qualifying homes. Qualifying home equity debt was limited to the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home or homes (the excess of the value of the home over the acquisition debt).
Another benefit was that the funds obtained via a home equity loan did not have to be used to acquire or improve the homes. So you could use home equity debt to pay for education, take a dream vacation, travel the world, buy a car, or whatever a taxpayer wished to do.
New Tax Cut Law: After December 31st 2017 there will no longer be any deduction for interest on home equity loans, regardless of when the debt was incurred. So far tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, taxpayers cannot claim a deduction for interest on home equity indebtedness.
The mortgage interest and home equity interest deduction changes last for eight years, through 2025. In 2026, the pre-Act rules come back into effect. So in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).
Summary: If you currently have home equity debt, be prepared to lose the interest deduction for it, starting in 2018. (You will still be able to deduct it on your 2017 tax return, filed in 2018.)
Alimony tax changes
Pre-Tax Cut Law: Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year. This was an “above-the-line” deduction. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim – which is more valuable for the taxpayer than an itemized deduction.)
In addition, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (the spouse had to include it in their gross income).
New Tax Law: Under the new rules, there is no deduction for alimony for the payer. None. In addition, alimony is not gross income to the recipient.
Summary: For divorces and legal separations that are executed after 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them. These new rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations.
New deduction for “qualified business income”
Pre-Tax Cut Law: There was no special deduction for qualified business income (QBI).
New Tax Law: A taxpayer with “qualified business income (QBI)” from a partnership, S corporation, or sole proprietorship, is allowed to deduct 20% of that income which is defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business.
The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business).
The deduction is taken “below the line,” meaning it reduces your taxable income but not your adjusted gross income. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss you can carryforward to the next year.
For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from “specified service” trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Summary: The deduction is intended to reduce the tax rate on qualified business income to a rate that is closer to the corporate tax rate.
Child and family tax credit
Pre-Tax Cuts law: Individuals can claim a maximum child tax credit (CTC) of $1,000 for each qualifying child under the age of 17. The CTC was phased-out when modified adjusted gross income (MAGI) was above certain threshold amounts ($110,000 for joint filers, $75,000 for single filers and heads of household, and $55,000 for married taxpayers filing separately).
New Tax Cut Law: For a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, the child tax credit (CTC) is increased to $ 2,000 and the threshold amounts for the phase-out (discussed below), was increased and you now can claim a partial credit for dependents who don’t qualify for a full CTC. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
Summary: The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit.
Miscellaneous itemized deductions disallowed
Pre–Tax Cut Law: Before the new laws, you could deduct certain miscellaneous itemized deductions to the extent they exceeded 2% of your adjusted gross income (AGI). These deductions included expenses like unreimbursed employee business expenses, investment expenses, and expenses for the production or collection of income, and expenses under the hobby loss rules, tax preparation costs and union dues.
New Tax Cut Law: Under the new law starting after December 31st 2017, there is no longer a deduction for miscellaneous itemized expenses which were formerly deductible to the extent they exceeded 2% of adjusted gross income.
Summary: Tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 the deduction is disallowed.
Pre-Tax Cut Law: A deduction is allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents to the extent the expenses exceed a threshold amount. To be deductible, the expenses may not be reimbursed by insurance or otherwise.
Under pre-Tax Cuts and Jobs Act law, the threshold was generally 10% of adjusted gross income (AGI). But for tax years beginning after Dec. 31, 2012, and ending before Jan. 1, 2017, a 7.5%-of-AGI floor for medical expenses applied if a taxpayer or the taxpayer’s spouse had reached age 65 before the close of the tax year
New Tax Cut Law: Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers – no matter what your age. In other words, the Tax Cuts and Jobs Act retroactively extends the tax break through 2018, and also retroactively makes it available to any individual taxpayer regardless of age for 2017–2018.
Summary: For medical expenses of individuals, the 7.5% (rather than 10%) threshold applies for AMT (as well as regular tax) purposes for 2017–2018.
For example, let’s assume you have adjusted gross income (AGI) of $200,000, unreimbursed hospital expenses of $35,000, and $5,000 of prescription drug expenses. That’s a total of $40,000 in medical expenses. 10% of you AGI is $20,000. So you can deduct medical expenses in excess of $20,000 (10% of your AGI). Which means you can deduct $ 20,000 of the $ 40,000 spent.
Health care “individual mandate”
Pre-Tax Cut Law: Nonexempt individuals had to either see that they and any of their dependents who are nonexempt individuals have minimum essential insurance coverage for the month or pay a monthly shared responsibility payment.
New Tax Cut Law: Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
Summary: The net result of these changes is that after 2018, you will not have a shared responsibility payment nor will there be any penalty imposed for failing to maintain minimum essential coverage.
Pre-Tax Cut Law: Under 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 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 Tax Law: For tax years beginning after Dec. 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. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates.
Summary: The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
Casualty and theft losses
Pre-Tax Cut Law: Taxpayers were generally allowed to claim an itemized deduction for unreimbursed personal casualty losses or from theft.
New Tax Law: The itemized deduction for casualty and theft losses is eliminated, except for losses incurred in a federally declared disaster.
Summary: You cannot claim a loss unless it was a federal disaster. If you have a personal casualty gain, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed the gain.
Pre-Tax Cut Law: Under pre-Act law, taxpayers could claim a deduction for moving expenses incurred in connection with starting a new job if the new workplace was at least 50 miles farther from a taxpayer’s former residence than the former place of work.
New Tax Law: The deduction for job-related moving expenses has been eliminated – except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.
Summary: If your employer reimburses you for moving expenses you will have to report that as income and you cannot offset that reimbursement by deducting moving expenses. Certain military personnel are excluded from this provision.
Estate and gift tax exemption
Pre-Tax Cut Law: A gift tax is imposed on certain lifetime transfers and an estate tax is
imposed on certain transfers at death. Currently, the first $5 million of transferred property is exempt from estate and gift tax.
New Tax Law: Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
Summary: The new law temporarily doubles the amount that can be excluded from these transfer taxes.
Alternative minimum tax (AMT) exemption
The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
Personal tax rates – reduced
After you reduce your taxable income by the various deductions and you have calculated your gross income, you are taxed at a certain percentage rate based on a tax table. The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The top rate will be reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly.
After December 31st 2017, the rates for single individuals is as follows:
If taxable income is: The tax is:
Not over $9,525 10% of taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $45,689.50 plus 35% of the excess over $200,000
Over $500,000 $150,689.50 plus 37% of the excess over $500,000
Married Filing Jointly and Surviving Spouse Income Tax Rates
If taxable income is: The tax is:
Not over $19,050 10% of taxable income
Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050
Over $77,400 but not over $165,000 $8,907 plus 22% of the excess over $77,400
Over $165,000 but not over $315,000 $28,179 plus 24% of the excess over $165,000
Over $315,000 but not over $400,000 $64,179 plus 32% of the excess over $315,000
Over $400,000 but not over $600,000 $91,379 plus 35% of the excess over $400,000
Over $600,000 $161,379 plus 37% of the excess over $600,000
Unless there are more administrative legislation, the Tax Cuts and Jobs Act changes will expire (sunset) after 2025, and the pre-Tax Cuts brackets and rates (i.e., 10%, 15%, 25%, 28%, 33%, 35% and 39.6%) will be back in effect.
The changes to the income tax brackets will lower tax rates at many income levels. But to determine if your household will actually see a decrease or increase in tax liability will be dependent on the impact of the many other Tax Cuts and Jobs Act changes.
Reduced tax rates could still produce a higher tax liability for a household that ends up with more income subject to tax because of the loss/or reduction of exemptions and deductions.
This article is intended for discussion purposes only and is not intended to provide specific tax advice. Please consult your tax practitioner or contact us to see how these rules may impact your personal situation.
Source: Steve Nelson, Michael Kitces, Kelly Phillips Erb