Law News and Tips
THE 2017 TAX CUTS AND JOBS ACT
We finally have the much ballyhooed and vilified 2017 tax act, the “Tax Cuts and Jobs Act” (the “2017 Act”) – don’t you just love these names. The 2017 Act changes a lot of fairly obscure provisions of the tax code that will affect a relatively small number of people, but some of the changes will impact a lot of people. How they affect individual taxpayers will have to be seen. It should be noted that a number of provisions under the old law have not been repealed, but they have only been suspended through 2025. This is probably due to budgetary requirements.
For purposes of this post, I want to provide a very brief summary of some of the provisions that I think will affect the most people. I can assure you that much more will be written on it in the future.
New Income Tax Rates and Brackets: The 2017 Act reduces most of the tax rates for individuals by 2 or 3 %. The 2017 Act also creates new tax brackets for trusts and estates. Under the old law, trust and estate rates were the same as those for individuals, but they were telescoped down so that you hit the maximum tax rate at about $12,500. This will change.
Increase in the Standard Deduction: Under current law, the standard deduction for 2018 would have been $13,000 for married couples; $9,550 for heads-of-households; and $6,500 for individuals who were either single or married but filing separately. Under the 2017 Act, the standard deduction is increased to $24,000 for married couples; $18,000 for heads-of-households; and $12,000 for individuals who are single or are married but filing separately. That’s the good news.
Personal Exemptions Suspended: Now for the bad news. In exchange for the increase in the standard deduction amounts, the deduction for personal exemptions is reduced to zero until 2026. It appears that these two changes in conjunction with one another mean that prior non-itemizers may come out ahead while prior itemizers may come up short.
New Inflation Adjustment Factor: Beginning in 2018, several inflation adjusted amounts will use a “chained” consumer price index (“CPI”) formula. Reportedly the chained CPI grows faster than the unchained rate. This is an obscure point, but it might work in the favor of taxpayers.
Kiddie Tax: Since this applies to kids up to 18 (or 22 if full-time students), this is probably a bad name. Perhaps a better name would be “dependent’s tax.” However, the 2017 Act changes the tax charged on a child’s income. Earned income will be taxed at single individual rates. Net unearned income (interest, dividends, rent, and royalties) will be taxed according to the new brackets for trusts and estates.
Capital Gains: The 2017 Act retains the present provisions on capital gains, but the breakpoints will be indexed for inflation using the new chained CPI.
A number of deduction provisions are also modified under the 2017 Act.
State and Local Tax Deductions: Non-business payments for state and local property taxes and income taxes are deductible, but only up to $10,000. This will be a bitter pill to swallow for residents of high income tax states.
Mortgage and Home Equity Loan Interest Deductions: The deduction for interest paid on home equity loans is suspended through 2025. For mortgages created after December 15, 2017, the deduction or mortgage interest is limited to interest paid on mortgages up to $750,000 for married couples (down from $1,000,000), and $375,000 (down from $500,000) for married taxpayers filing separately. This new lower limit does not apply to pre-December 15, 2017, mortgages, but it would apply to any refinancing of old mortgages.
Charitable Contribution Rules: The limitation on the deduction for cash contributions to public charities (generally schools and universities, churches, museums, etc.) is increased from 50% of the donor’s AGI to 60% of his or her AGI. There is no increase in the deductibility of non-cash contributions to public charities or any contributions to what are called private foundations.
Miscellaneous Itemized Deductions: Under current law, a taxpayer can deduct certain expenses (such as the cost of preparing tax returns) to the extent that they exceeded 2% of the taxpayer’s AGI. This deduction has been suspended through 2025.
Individual Mandate: The individual mandate under the Affordable Care Act which imposed a penalty for not maintaining a mandated health insurance policy has been repealed.
Alternative Minimum Tax: The tax code imposes an additional tax on certain “tax preference” items and on excess children. Income is exempt up to a certain amount. For taxpayers who are hit by this tax, the 2017 Act almost doubles the exemption.
529 Accounts: Under current law, 529 plans could be used to pay for qualified higher education expenses. Under the 2017 Act, these plans can be used for tuition at elementary and secondary public, private, or religious schools, and even for certain home school expenses, up to a $10,000 annual maximum.
Estate and Gift Taxes: The 2017 Act doubles the estate tax exemption amount, indexed for inflation. It is expected that the 2018 exemption amount will be $11.2 million ($22.4 million for married couples). I’ll write more on that in the future. This increase also increases the generation skipping tax exclusion amount.
Qualified Business Deduction: The 2017 Act added a new deduction for non-corporate taxpayers engaged in a business activity other than certain service businesses, including law and accounting. The deduction is allowed for S-corporation shareholders. The math is complicated, but it’s basically connected to a business’ W-2 wages. In promoting the 2017 Act, the Republicans said that it would promote the creation of jobs. It seems that this deduction does that, but time will tell.
There has been a lot of spin put on the 2017 Act by both the left and the right. Time will tell how it plays out nationally, but to see how it will affect your taxes personally, you will probably need to see your tax advisor.
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