From changes in tax rates to a doubled standard deduction – and much more – individual taxpayers are scrambling to keep up with the flood of changes made under the Tax Cuts and Jobs Act (TCJA) of 2017. For many taxpayers, the changes made by the most recent tax reform represent a host of tax planning challenges and opportunities.
Due to the elimination or limitation on itemized deductions, and the elimination of personal exemptions, a key consideration in planning is to first look at ways to lower your taxable income. For example, you may want to maximize all pretax contribution opportunities such as your 401(k) and maximizing deductible IRA contributions.
Also, despite the headlines, it will remain important for you to keep track of your medical expenses, mortgage interest, property and state income or sales tax payments and charitable contributions made during 2018 due to the new restrictions on itemized deductions. Highlighted below are some of the more significant changes made by the TCJA, as well as possible challenges and opportunities to lower your tax bill for 2018 and beyond.
Lower Individual Tax Rates: The legislation creates lower individual income tax brackets of 10 percent, 12 percent, 22 percent, 24 percent, 32 percent and 35 percent, and lowers the top rate from 39.6 percent to 37 percent, respectively. (The pre-reform rates in effect before 2018 would be restored in 2026—i.e., 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent, respectively.)
Modification of the Alternative Minimum Tax (AMT): The legislation retains the AMT for individuals but increases the exemption amount and phaseout thresholds so fewer people will pay it. From 2018 through 2025, a higher AMT exemption will apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will begin to phase out at $1 million for joint filers and $500,000 for other taxpayers. These thresholds will be adjusted for inflation annually.
Increase in the Standard Deduction: For 2018 through 2025, the standard deduction increases significantly from $12,700 in 2017 to $24,000 for joint filers; from $9,350 to $18,000 for heads of households; and from $6,350 to $12,000 for singles. These amounts will be adjusted for inflation annually. Since you can claim the higher of the standard deduction or itemized deductions, you will want to closely compare the two methods as you may now benefit from a higher standard deduction given the many changes to itemized deductions.
Elimination of Personal Exemptions: In exchange for lower tax rates and an increase in the standard deduction, personal exemptions no longer may be claimed for tax years 2018 through 2025.
Child and Dependent Credits: For tax years 2018 through 2025, the TCJA increases the value of the child tax credit from $1,000 to $2,000 per child under age 17. As much as $1,400 of the credit will be refundable, thus allowing recipients to benefit even if they don’t owe taxes. You will need to provide your child’s Social Security number to claim the refundable portion through 2025. The refundable portion of the credit will be indexed for inflation. The legislation also expands eligibility for the credit by increasing the phaseout threshold to $400,000 of adjusted gross income for joint filers (up from $110,000 under pre-reform law), with a threshold for all other filers set at $200,000. A $500 nonrefundable credit for dependents other than qualifying children will be available through 2025 (and no Social Security number is required).
$10,000 Cap on State and Local Tax Deduction: In a significant departure from prior law, the legislation will allow individuals to deduct no more than $10,000 of any combination of state and local income taxes, state and local property taxes and sales taxes for tax years 2018 through 2025. This overall limitation may result in the enhanced standard deduction yielding a larger deduction against your adjusted gross income and thus a lower tax bill.
Limits on Mortgage Interest Deduction: The TCJA reduces the amount of mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages incurred after Dec. 15, 2017. (The $1 million limitation remains for older debt.) Interest on your principal residence and a second home is deductible. Importantly, however, beginning in 2018, interest on home equity indebtedness no longer is deductible, regardless of when it was incurred. These rules apply through 2025.
Medical Expense Deduction: All individuals may deduct medical expenses for 2017 and 2018 if the expenses exceed 7.5 percent of adjusted gross income, regardless of age. However, the AGI threshold returns to 10 percent of adjusted gross income in 2019 for all taxpayers, regardless of age. Again, you will need to review whether claiming such expenses, when combined with other allowable itemized deductions, yields a higher deduction than the standard deduction.
Charitable Contributions: For tax years 2018 through 2025, the legislation increases the AGI limitation on cash contributions from 50 percent to 60 percent, thus effectively allowing for an increased deduction. However, the TCJA permanently repeals the 80 percent deduction for contributions made for university athletic seating rights, effective for contributions made after 2017.
Moving Expense Deduction: The deduction for moving expenses is eliminated for tax years 2018 through 2025 except for individuals who are active duty members of the United States Armed Forces.
Elimination of Miscellaneous Itemized Deductions (Including Unreimbursed Employee Business Expenses): The TCJA eliminates the deduction for miscellaneous itemized deductions for tax years 2018 through 2025. Thus, deductions subject to the 2 percent floor of adjusted gross income for costs related to the production or collection of income such as appraisal fees, investment fees and safety deposit box rentals are not deductible. Importantly, expenses related to employment, such as uniforms, union dues, professional society dues, cell phone, computer used for work and job-hunting expenses also are not deductible. Employees who incur significant unreimbursed business expenses may want to ask their employer about adjusting their compensation or establish an accountable expense reimbursement plan that would allow the employer to reimburse the employee tax-free while entitling the employer to a deduction against their business income.
Alimony Deduction: The tax legislation repeals the above-the-line deduction for alimony paid for divorces or separations executed after Dec. 31, 2018. After that date, alimony payments will not be included in the recipient’s income and the payments no longer will be deductible by the payor. If you are currently contemplating divorce or separation, a careful review of the effects of the new law should be undertaken to determine the economic effects on your tax situation and timing of any agreements.
If you have any questions regarding your personal tax and financial situation, please contact us today!