The Tax Cuts and Jobs Act makes sweeping changes to the tax rules for individuals. But some of the new provisions won’t necessarily be relevant to your situation. Here’s a quick reference guide to the major issues under the new law to help you understand what’s changing.
In general, the changes for individual taxpayers are effective for 2018 through 2025, unless otherwise noted.
Effects on Personal Taxes
1. Affordable Care Act individual mandate penalty – Permanently repeals the penalty for failure to obtain minimum essential health coverage, starting in 2019.
2. Alimony payments – Permanently eliminates 1) deductions for alimony payments required by post-2018 divorce agreements, and 2) the requirement that alimony recipients report payments as taxable income. Treatment of alimony payments required by pre-2019 divorce agreements and child support payments is generally unchanged.
3. Alternative minimum tax (AMT) – Retains the AMT for individuals; raises both the exemption amount and the exemption phaseout thresholds.
4. Capital gains and qualified dividend rates – Retains prior-law maximum rates on net long-term capital gains and qualified dividends, as well as the 3.8% net investment income tax (NIIT) for higher-income individuals. These rates are no longer tied to ordinary-income tax brackets.
5. Charitable contributions – Increases income-based limits for individuals from 50% to 60%; eliminates deductions for contributions paid to colleges in exchange for athletic event tickets. Larger standard deductions may eliminate the tax incentive to donate to charities for some taxpayers.
6. Child tax credit – Doubles the credit to $2,000 per eligible child; increases income phaseout thresholds. A new $500 credit may be available for other qualified dependents, including a qualifying 17- or 18-year-old, a full-time student under age 24, a disabled child of any age, and other nonchild relatives.
7. Dependent exemption – Suspends this deduction.
8. Discharges for student loan indebtedness – Extends the exclusion from gross income to discharges due to a student’s death or disability.
9. Family and medical leave – Introduces a new credit to motivate employers to offer up to 12 weeks of paid family and medical leave for qualifying employees. This credit is available only for 2018 and 2019.
10. Federal estate tax – Increases the unified estate and gift tax exemption from $5 million to $10 million, indexed annually for inflation. For 2018, the exemption is $11.18 million (effectively $22.36 million for married couples).
11. Gambling – related expense deductions for gambling professionals -Limits the deduction for gambling-related expenses (such as transportation and lodging) and gambling losses (combined) to that year’s gambling winnings.
12. Generation-skipping transfer (GST) tax – Increases the GST tax exemption to the same amount as the unified estate and gift tax exemption. (See “Federal estate tax” above.)
13. Hobby loss deductions – Suspends itemized deductions for hobby-related expenses.
14. Home equity loans – Suspends the deduction for interest paid on up to $100,000 of home equity debt, unless the proceeds are used to buy, build or substantially improve the home secured by the debt. (Then it can be treated as acquisition debt.) Total home acquisition debt can’t exceed $750,000.
15. Itemized deductions – Eliminates the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various itemized deductions; suspends the itemized deduction phaseout rule for high-income taxpayers.
16. Kiddie tax – Simplifies the kiddie tax rules. Earned income is taxed based on rates for single taxpayers, and unearned income above the annual threshold is taxed based on rates for trusts and estates. A child’s tax is unaffected by the parent’s tax situation or the unearned income of siblings.
17.Like-kind exchanges – Eliminates favorable treatment under Section 1031 for exchanges of personal property; retains it for exchanges of real property.
18. Loan balances for departing employees – Introduces new rules for employees with outstanding 401(k) loan balances.
19. Medical expense deduction – Reduces the adjusted gross income (AGI) threshold for itemized medical expense deductions to 7.5% (from 10% under prior law) for only 2017 and 2018.
20. Miscellaneous expense deductions – Suspends this itemized deduction for such items as tax preparation costs, investment expenses, union dues and unreimbursed employee business expenses.
21. Mortgage interest deduction – Limits the deduction to interest paid on the first $750,000 of home acquisition debt, down from $1 million, generally starting with loans taken out after December 15, 2017. Pre-existing home acquisition debts are grandfathered under prior law.
22. Moving expenses – Suspends the deduction for job-related moving expenses, except for certain military personnel; suspends the income exclusion for moving expense reimbursements from employers.
23. Personal casualty loss deduction – Allows this deduction only in a federally declared disaster.
24. Personal exemptions – Suspends this deduction.
25. Roth IRA conversion recharacterization – Permanently disallows the reversal of ill-advised Roth conversions done in 2018 and beyond to avoid the conversion tax hit.
26. Section 529 plans -Allows distributions from Sec. 529 plans of up to $10,000 per year for an account beneficiary’s tuition at a public, private or religious elementary or secondary school.
27. Standard deduction – Nearly doubles the standard deduction to $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers.
28. State and local tax (SALT) deduction – Limits the deduction to $10,000 annually for combined state and local 1) property taxes and 2) income taxes (or sales taxes if that option is chosen).
29. Tax rates and brackets – Reduces most individual income tax rates, with new thresholds for each bracket. Under the TCJA, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
30. Withholding – Requires taxpayers to reassess withholding from regular paychecks or quarterly estimated tax payments for other sources of income.
Also, be aware that federal tax law changes could affect state income tax obligations. This trickle-down effect will create uncertainty as states decide whether to conform to or decouple from the federal rules.
Meet with a Tax Pro
House Republicans promise to introduce additional legislation later this year that would make individual tax cuts under the TCJA permanent. If a bill passes the House, it would face an uncertain future in the Senate, where it would need 60 votes to pass. Republicans currently hold 51 seats in the Senate.
In the meantime, it’s important for you to meet with your tax advisor to determine how the changes will affect your personal tax situation in 2018 and beyond.
Self-employed individuals and owners of pass-through business interests should read Watch Out for these Tax Issues When Planning for Your Business in 2018 and contact their tax professionals regarding relevant tax planning strategies.