The Tax Cuts and Jobs Act of 2017 significantly impacts all individual taxpayers generally starting in the 2018 tax year. Most of the tax reform related to individual taxpayers is temporary as many of the tax provisions sunset (i.e. expire) after the year ending December 31, 2025. Provided below is a listing of many of the individual tax reform changes that impact a significant amount of individual taxpayers:
Reduction of Individual Income Tax Rates
The tax reform replaces the individual tax brackets for all individual taxpayers. The tax brackets under tax reform have been modified so that the tax liability based on the same taxable income amounts has been lowered. For example, a married taxpayer filing jointly that has $250,000 of taxable income will be required to pay taxes of $57,717 in 2017 versus $48,579 under tax reform in 2018. The example ignores the special rates such as capital gains and dividends. The individual tax brackets enacted under tax reform will not apply for any taxable years beginning after December 31, 2025. The 2017 and 2018 tax brackets for individual taxpayers are as follows:
| 2017 Federal Individual Income Tax Rates | Single | Heads of Households | Married Filing Jointly/Surviving Spouses | Married Filing Separately | Estates & Trusts |
| 10% Tax Bracket | Up to $9,325 | Up to $13,350 | Up to $18,650 | Up to $9,325 | |
| 15% Tax Bracket | Over $9,325 but not over $37,950 | Over $13,350 but not over $50,800 | Over $18,650 but not over $75,900 | Over $9,325 but not over $37,950 | Up to $2,550 |
| 25% Tax Bracket | Over $37,950 but not over $91,900 | Over $50,800 but not over $131,200 | Over $75,900 but not over $153,100 | Over $37,950 but not over $76,550 | Over $2,550 but not over $6,000 |
| 28% Tax Bracket | Over $91,900 but not over $191,650 | Over $131,200 but not over $212,500 | Over $153,100 but not over $233,350 | Over $76,550 but not over $116,675 | Over $6,000 but not over $9,150 |
| 33% Tax Bracket | Over $191,650 but not over $416,700 | Over $212,500 but not over $416,700 | Over $233,350 but not over $416,700 | Over $116,675 but not over $208,350 | Over $9,150 but not over $12,500 |
| 35% Tax Bracket | Over $416,700 but not over $418,400 | Over $416,700 but not over $444,550 | Over $416,700 but not over $470,700 | Over $208,350 but not over $235,350 | |
| 39.6% Tax Bracket | Over $418,400 | Over $444,550 | Over $470,700 | Over $235,350 | Over $12,500 |
| 2018 Federal Individual Income Tax Rates after Tax Cuts and Jobs Act | Single | Heads of Households | Married Filing Jointly/Surviving Spouses | Married Filing Separately | Estates & Trusts |
| 10% Tax Bracket | Up to $9,525 | Up to $13,600 | Up to $19,050 | Up to $9,525 | Up to $2,550 |
| 12% Tax Bracket | Over $9,525 but not over $38,700 | Over $13,600 but not over $51,800 | Over $19,050 but not over $77,400 | Over $9,525 but not over $38,700 | |
| 22% Tax Bracket | Over $38,700 but not over $82,500 | Over $51,800 but not over $82,500 | Over $77,400 but not over $165,000 | Over $38,700 but not over $82,500 | |
| 24% Tax Bracket | Over $82,500 but not over $157,500 | Over $82,500 but not over $157,500 | Over $165,000 but not over $315,000 | Over $82,500 but not over $157,500 | Over $2,550 but not over $9,150 |
| 32% Tax Bracket | Over $157,500 but not over $200,000 | Over $157,500 but not over $200,000 | Over $315,000 but not over $400,000 | Over $157,500 but not over $200,000 | |
| 35% Tax Bracket | Over $200,000 but not over $500,000 | Over $200,000 but not over $500,000 | Over $400,000 but not over $600,000 | Over $200,000 but not over $300,000 | Over $9,150 but not over $12,500 |
| 37% Tax Bracket | Over $500,000 | Over $500,000 | Over $600,000 | Over $300,000 | Over $12,500 |
Increase in Standard Deduction and Repeal of the Deduction for Personal Exemptions
The standard deduction for all taxpayers is almost doubled. The standard deduction is based on each taxpayer’s filing status, i.e. single, heads of households, married filing jointly, or married filing separately. A comparison of 2017 vs. 2018 is as follows:
| 2017 | 2018 | |
| Single | $6,350 | $12,000 |
| Heads of Households | $9,350 | $18,000 |
| Married Filing Jointly | $12,700 | $24,000 |
| Married Filing Separately | $6,350 | $12,000 |
The standard deduction increase is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.
The deduction for personal exemptions is suspended for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025. For 2017, the deduction for personal exemptions is allowed at $4,050 for each qualifying individual. Personal exemptions are generally allowed by the taxpayer, his or her spouse, and any dependents. Though it should be noted that the personal exemptions begin to be phased out for taxpayers with Adjusted Gross Income in excess of $313,800 for married filing jointly, $287,650 for heads of households, $156,900 for married filing separately, and $261,500 for single filers.
Increase in the Child Tax Credit
The child tax credit is not only doubled, but also phases out at a much higher rate, allowing more taxpayers to receive benefit. A child tax credit is allowed for each qualifying child under the age of 17. For 2017, the maximum credit allowed per qualifying child is $1,000, but is reduced when the taxpayer’s modified adjusted gross income is over $75,000 for single and heads of households, $110,000 for married filing jointly, and $55,000 for married filing separately. For 2018, the child tax credit is increased to $2,000 for each qualifying child under the age of 17. The credit is reduced for taxpayers when their adjusted gross income is in excess of $400,000 for married filing jointly and $200,000 for all other taxpayers. The child tax credit increase is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.
Modifications to Itemized Deductions
Repeal of overall limitation on itemized deductions –
For 2017, itemized deductions begin to be reduced for taxpayers with Adjusted Gross Income above certain thresholds, which are $313,800 for married filing jointly, $287,650 for heads of households, $156,900 for married filing separately, and $261,500 for single filers.
For 2018, the limitation on itemized deduction has been repealed. The repeal is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.
Modification of deduction for home mortgage interest –
The allowed interest deduction on the home mortgage is based on the acquisition indebtedness of the taxpayer’s principal residence and one other residence selected by the taxpayer, provided that there are two qualifying residences. For 2017, the maximum amount treated as acquisition indebtedness is $1 million ($500,000 for married filing separate). In addition, there is an additional allowed deduction for home equity indebtedness of up to $100,000 ($50,000 for married filing separately).
For 2018, a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 for married filing separately), if the house is acquired after December 14, 2017. In the case of acquisition indebtedness incurred before December 15, 2017 this limitation is still $1 million ($500,000 for married filing separate). The additional deduction for home equity indebtedness is suspended. The modifications of the home mortgage interest deductions are for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.
Limitation of deduction for taxes not paid or accrued in a trade or business –
For 2017, individuals are permitted a deduction for the following taxes not paid or accrued in a trade or business: (1) state, local, and foreign real property taxes, (2) state and local personal property taxes and (3) state, local, and foreign income taxes. The taxpayer may take the state and local general sales tax deduction in lieu of the state and local income tax deduction.
For 2018, individuals are permitted a deduction up to $10,000 ($5,000 married filing separately), except foreign real property taxes cannot be deducted. In addition, there is no allowed deduction in 2017 for prepayment of 2018 state and local income taxes, while there was no mention of prepayment for 2018 property taxes. Based on recent IRS guidance, it is reasonable to assume that the prepayment of property taxes will be allowed, if they have been both assessed and paid in 2017. The modifications of the deduction for taxes not paid or accrued in a trade or business is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025. Taxes paid in a trade or business are still deductible and do not have limitations.
Modification to the charitable contribution deduction –
For 2017, generally the charitable contribution deduction is limited to 50 percent of Adjusted Gross Income.
For 2018, the limit is increased to 60 percent. In addition, no charitable contribution deduction is allowed for a payment to an institution of higher education in exchange for which the taxpayer receives the right to purchase tickets or seating at an athletic event. These two modifications are effective for contributions made in taxable years beginning after December 31, 2017. The increased 60 percent limit is effective until tax years beginning after December 31, 2025.
Repeal of miscellaneous itemized deductions subject to the two-percent floor –
For 2017, some itemized deductions are allowed in excess of two-percent of Adjusted Gross Income for the taxpayer. Examples of these include tax preparation fees, unreimbursed employee expenses, the home office deduction, deductible investment expenses from pass-through entities, and investment advisory fees.
For 2018, miscellaneous itemized deductions subject to the two-percent floor are suspended. The suspension of the miscellaneous itemized deductions subject to the two-percent floor is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.
Modification to the medical expenses deduction –
For tax years beginning after December 31, 2016 and ending before January 1, 2019, the threshold for deducting medical expenses has changed from 10 percent to 7.5 percent of Adjusted Gross Income. The deduction reverts back to 10 percent of Adjusted Gross Income for tax years beginning after December 31, 2018.
Other Modifications to Income & Expenses
Repeal of the alimony payment deduction and corresponding inclusion in gross income –
For 2017, payments for alimony are deductible by the payor spouse and includible in income for the recipient spouse. For any divorce or separation instrument executed after December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification, payments for alimony are not deductible by the payor spouse and are not includible in income by the recipient spouse.
Repeal of the moving expenses deduction –
For 2017, taxpayers are permitted to take a deduction for moving expenses, if the move is for commencement of work by the taxpayer as an employee or as a self-employed individual at a new place of work. Additionally, the taxpayer must meet certain distance requirements to be allowed the deduction.
For 2018, the moving expenses deduction has been repealed, unless the taxpayer is a member of the Armed Forces on active duty and is pursuant to a military order and incident to a permanent change of station. The repeal of the moving expenses deduction is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025. Additionally, for the same period, employer reimbursements for moving expenses are includible in the individual’s income, with the same exception for active duty Armed Forces members.
Deduction for qualified business income and limitation on losses for taxpayers other than C-corporations –
Income and losses from ownership interests in “pass-through” entities, including sole proprietorships, partnerships, and S-Corporations are reported on the taxpayer’s individual income tax return.
For 2018, a new 20 percent deduction may be allowed for the income received from the pass-through entities. There are limiting factors that need to be applied to determine what deduction each individual will receive for income from the pass-through entities.
In addition, excess business losses of a taxpayer other than a corporation are not allowed for the taxable year. The excess business loss will be applied at the shareholder or partner level for S-corporations and partnership, respectively. An excess business loss is a loss in excess of $500,000 for married filing jointly taxpayers and $250,000 for all other individual taxpayers. The losses will be carried forward as a net operating loss carry forward. The limitation applies after the application of the passive activity loss rules. These provisions for qualified business income and excess business losses are for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025. These topics will be discussed in further detail in an upcoming article.
Increase in Alternative Minimum Tax Exemption
An alternative minimum tax (“AMT”) is imposed on an individual in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. The tentative minimum tax is calculated based off the alternative minimum taxable income (“AMTI”) as it exceeds an exemption amount. The AMTI is calculated using taxable income and adjusting for any required tax preference items. The exemption and phase out thresholds for the exemption in 2017 are increased for 2018. The AMT exemption and phase out increase is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025. A comparison of the 2017 and 2018 exemptions is as follows:
| 2017 | 2018 | |
| Single | $54,300 | $70,300 |
| Heads of Households | $54,300 | $70,300 |
| Married Filing Jointly | $84,500 | $109,400 |
| Married Filing Separately | $42,250 | $54,700 |
Increase in the Estate and Gift Tax Exemption
The estate and gift tax exemption is doubled. A gift tax is imposed on certain lifetime transfers, and an estate tax is imposed on certain transfers at death. For 2017, the estate and gift tax exemption is $5.49 million. The doubling of the estate and gift tax exemption applies to estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026.
