The new tax reform law passed in December of 2017 (the "Tax Cuts and Jobs Act” or TCJA) is the biggest overhaul of the federal income tax code since 1986. It will have huge effects on individuals in 2018 and beyond. This special report covers the main issues of the new tax law that will affect individuals.
- The new law keeps the seven tax brackets but with different rates and break points. I’m not going to detail it here but whatever tax bracket you are in, your income will be taxed at lower rates than under the old law.
- The standard deduction will nearly double in 2018. It will increase to $24,000 for couples, $12,000 for individuals, and $18,000 for heads of household.
- Individuals age 65 or older and the blind will continue to receive an additional standard deduction under the new tax law. For 2018, each person can claim an additional $1,300 deduction (an unmarried individual can claim $1,600).
- Personal exemptions for all filers are repealed.
- The child tax credit (direct dollar-for-dollar reduction of tax) is doubled to $2,000 for every dependent under age 17. Up to $1,400 of the credit is refundable for lower income taxpayers. The AGI phase-out starts at a much higher limit of $400,000 for couples and $200,000 for singles and heads-of-household.
- A new $500 credit is added for each dependent who is not a qualifying child.
- Home mortgage deductions are limited. Interest can be deducted on up to $750,000 of new acquisition debt on a primary or second residence. This is down from $1 million. This applies to mortgage debt incurred after December 14, 2017. Older loans, and refinancing of old loans, get the $1 million cap.
- There will no longer be a deduction for the interest paid on home equity loans.
- State and local tax (SALT) deductions will now be limited to $10,000. Property taxes are still fully deductible for businesses and owners of rental property.
- The law eliminates the deduction for job-related moves except for military personnel.
- All miscellaneous itemized deductions (reported on Schedule A) that are subject to the 2% of AGI threshold are eliminated. This includes (but is not limited to):
- Employee business expenses
- Brokerage fees
- IRA custodial fees
- Hobby expenses
- Theft and casualty losses (except for those in presidentially declared disaster areas)
- Alimony deductions for post-2018 divorce decrees. This is good news for those who receive alimony; they will not have to report it as income.
- The medical expense deduction limitation for 2017 and 2018 is reduced from 10% to 7.5% of adjusted gross income.
- Charitable contributions remain, and the AGI limitation on cash donations to qualified charities increases from 50% to 60%.
- The phase-out of itemized deductions for higher-income taxpayers is eliminated.
- The new law makes converting a traditional IRA to a Roth IRA something that should be done carefully. In the past you had until October 15th of the following year to reverse the conversion if the ROTH lost money. After 2017 conversions are irreversible.
- Unearned income of dependent minor children is no longer taxed at the parents’ rate. It is taxed at trust return rates, which are normally lower than the parents' rate but higher than the child's rate.
- The new law lowers the individual alternative minimum tax (AMT) by increasing the exemption amount to $109,400 for joint returns and $70,300 for singles and heads of household. The exemption starts at $1 million for couples and $500,000 for single filers and heads of household.
- The Obamacare requirement that individuals have health insurance, qualify for an exemption, or pay a fine is repealed for years after 2018.
- Tax-free treatment of like-kind properties has been eliminated for all but real estate transactions.
- The estate and gift tax exemption per person is doubled to $10 million from $5 million.
To reflect the new lower tax rates and tax brackets, higher standard deductions, and repeal of personal exemptions, the IRS has issued new 2018 withholding tables. Most wage earners will see an increase in their paychecks starting no later than February 15, 2018.
