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THE TAX CUTS AND JOBS ACT: Changes to Individual Taxation

Changes to individual Taxation

Most of the changes to individual taxation are set to expire at the end of 2025, which means that in 2026, as long as Congress has not passed another round of tax reform, the rules will default back to the familiar, pre-reform tax code of 2017.

TAX RATES

The Act includes changes to the individual income tax rates and their respective brackets, which are outlined below for both single filers and those filing jointly. These temporary rate changes take effect beginning in the 2018 tax year and will expire at the end of 2025.

*Note: The new law had no change on the current tax treatment of qualified dividends and capital gains

STANDARD DEDUCTION

As with the tax rates, changes in the standard deduction will take effect in 2018 and expire at the end of 2025. The Act increases the standard deduction to $24,000 for joint filers, $18,000 for head-of-household filers and $12,000 for individual filers. These amounts nearly doubled compared to the previous tax law, with the hope of encouraging taxpayers to use the standard deduction instead of itemizing their deductions. The additional standard deduction for visually impaired individuals and those over the age of 65 remain unchanged ($1,300 for married individuals and $1,600 for unmarried individuals).

PERSONAL EXEMPTIONS

The new law temporarily eliminates the deduction for personal exemptions from 2018-2025. Prior to the passage of The Act, taxpayers could claim a $4,050 exemption for themselves and each of their dependents. The more dependents a household claims, the more this change will impact their taxes. Fortunately, The Act also features enhanced child tax credits to lessen the blow to those larger families.

AFFORDABLE CARE ACT

The Act repeals the “individual mandate” portion of the Affordable Care Act beginning January 1, 2019, meaning taxpayers will no longer be penalized for not having full coverage throughout the year. However, all other ACA taxes such as the 3.8% Net Investment Income Tax, the additional Medicare Tax, and the Medical Device Excise Tax were left unchanged.

ITEMIZED DEDUCTIONS

Our full list of changes to itemized deductions is included in "The Tax Cuts And Jobs Act: Changes to Itemized Deductions"

KIDDIE TAX

The Kiddie Tax on unearned income for children under the age of 19 and college students under the age of 24 will now be based on the rates for trusts and estates rather than their parents’ rates. All other rules relating to the Kiddie Tax remain unchanged. 

CHILD TAX CREDIT

The Child Tax Credit has been increased to $2,000 per qualifying child from the previous $1,000 (allowing up to $1,400 to be refundable) and raises the adjusted gross income phase-out threshold to $400,000 for joint filers ($200,000 for all other filers). In addition to these increases, the new child tax credit also allows for a $500 nonrefundable credit for qualifying dependents other than children.

EDUCATION

The Act does not repeal the student loan interest deduction. For 2018, the maximum interest deduction amount of $2,500 remains unchanged, as do The American Opportunity Tax Credit and the exclusion for interest on U.S. savings bonds used for higher education. 

SECTION 529 PLANS

An annual distribution of up to $10,000 from 529 plans per beneficiary is now allowed, to be used for tuition expenses for public, private or religious elementary or secondary schools. The limitation applies to a per-student basis rather than a per-savings-account basis. The distribution allowances for higher education tuition expenses have not changed.

 

ALIMONY

The new law eliminates the deduction for alimony payments and the corresponding inclusion in income by the recipient. The new rule will apply for any divorce or separation instrument executed after December 31, 2018, or for any divorce or separation instrument executed before December 31, 2018 and modified after that date, if the modification expressly provides that this rule applies to such modification.

RETIREMENT

The Act repeals a rule which previously allowed taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions. Recharacterization can no longer be used to unwind a Roth conversion.

In addition, the new law extends the “loan offset” rollover period from 60 days to the due date of the tax returns. A retirement plan loan offset amount is generated when the benefits accrued by a plan participant are reduced in order to repay a loan taken from the plan. These offset amounts are treated like distributions, but allowed to be rolled to a new plan in order to defer taxation on the deemed distribution. The new law simply extends the amount of time a taxpayer has to rollover these amounts into a new plan.

Otherwise, the laws relating to retirement plans remain unchanged.

FEDERAL ESTATE TAX

The new law doubles the estate and gift tax exclusion amount for estates of decedents dying and gifts made during the 2018-2025 tax years. Previously, the exclusion amount was $5,000,000 per person, adjusted for inflation. Under this new law, the exclusion amount is projected to be $11,200,000 per person for 2018 ($22,400,000 for husband and wife). As before, beneficiaries will continue to receive a “stepped-up” basis at the date of death for inherited assets.

*Note: The generation-skipping transfer tax exemption amount is also increased by this act.

ALTERNATIVE MINIMUM TAX

The Act significantly raises the income exemption levels for the individual AMT. The exemption amount is increased to $109,400 for joint filers, $70,300 for single filers and $54,700 for married taxpayers filing separately. In addition, it increases the exemption phase-out threshold to $1,000,000 for joint filers and $500,000 for all other taxpayers (other than estates and trusts). These amounts will be indexed for inflation annually.

DISASTER RELIEF PROVISIONS

As mentioned previously, casualty losses are no longer deductible, unless covered by specific federal disaster declarations. Under the new law, “net disaster loss”, defined as the excess of personal casualty losses attributable to a federally declared disaster over personal casualty gains such as insurance reimbursements, can now increase the standard deduction. This means that taxpayers are not required to itemize their deductions to receive this benefit. Compared to previous casualty loss rules, the $100 floor is now increased to $500, and the 10% adjusted gross income threshold is entirely eliminated. These provisions are for 2016 and 2017 disasters only.

The new legislation also allows affected taxpayers to distribute up to $100,000 from their retirement plans for “Qualified 2016 Disaster Distributions” without being subject to the 10% early withdrawal penalty.

For more details related to the changes described above or if you have any questions, please feel free to contact us.