Tax Reform…What Does It Mean for Me?
By Amy C. Smith, CPA
With the most significant tax reform in the last 30 years passing at the end of 2017, many individuals are asking about their own personal impact. Based on the vastness of the Tax Cuts and Jobs Act, the impacts will be quite broad. Let’s focus on a few of the more relevant changes for individual taxpayers.
To enable the cost of the plan to comply with budgetary rules, the individual provisions are temporary and effective for eight years, beginning January 1, 2018 and set to expire December 31, 2025. If Congress takes no further action, the individual provisions will sunset after December 31, 2025.
The bracket structure was maintained, but the income ranges and tax rates for each bracket have been modified. The tax rate has been lowered for most brackets and the top marginal rate decreased from 39.6% to 37%. The lowest tax rate remains at 10%. The act eliminates the personal exemptions and almost doubles the standard deduction, raising married filing joint to $24,000, head of household to $18,000 and $12,000 for other individuals.
Although there is a significant increase to the standard deduction, a large number of individual taxpayers will still benefit from itemized deductions on their tax return. The summary below highlights some key changes to itemized deductions:
- Medical Deductions – Taxpayers will be able to claim a deduction for medical expenses that exceed 7.5% of adjusted gross income for 2017 and 2018.
- State/Local/Property Taxes – Taxpayers will be limited to a deduction of $10,000 for the combination of state, local and property taxes.
- Charitable Deductions – Cash contributions can be deducted up to 60% of adjusted gross income. Charitable contributions connected with college athletic events will no longer be deductible.
- Mortgage Interest – For loans taken out after December 15, 2017, the acquisition indebtedness is capped at $750,000. Loans taken out prior to this date will continue to have the $1,000,000 threshold.
- Miscellaneous Itemized Deductions – Taxpayers will no longer be able to claim a deduction for items that fall into this category, such as investment management fees, unreimbursed employee expenses, and tax preparation fees.
- Overall Limitation – The overall limitation on itemized deductions has been repealed.
Now, let’s look at a few other changes outside of itemized deductions:
- Alternative Minimum Tax – While this has been retained for individual taxpayers, the exemption and exemption phase-out has been increased.
- Child Tax Credit – The child tax credit has been increased from $1,000 to $2,000 per qualifying child, with $1,400 being refundable. The act also adds a $500 credit for a dependent that is not a “qualifying child.” The income phase-out associated with the child tax credit has been significantly increased, with the new phase-out starting at $400,000 for married filing joint.
- Alimony – For divorce decrees after December 31, 2018, the payor will no longer receive a deduction for alimony payments and the payee will no longer have to include payments as income.
- Individual Health Insurance Mandate – The penalty for failing to maintain adequate health insurance has been repealed effective January 1, 2019.
While this article highlights some of the key changes affecting individual taxpayers under the Tax Cuts and Jobs Act, it does not encompass all of the changes that will affect individual taxpayers in the coming years. Therefore, we encourage you to reach out to your tax advisors to determine how the act will impact you.