Key provisions of the Tax Cuts and Jobs Act
The recently enacted Tax Cuts and Jobs Act (TCJA) is one of the more significant changes in decades to the Tax Code. While touted as “tax simplification”, the result is anything but simplification. Below are some of the key provisions of the TCJA.
Individual Tax Rates and Brackets:
The TCJA provides for new tax rates, which are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers and $600,000 for married couples filing jointly. The rates for qualified dividends and long-term capital gains remain unchanged. Furthermore, the TCJA did not repeal the existing Medicare taxes (the 0.9% additional payroll tax or the 3.8% tax on net investment income) that applied to higher income taxpayers.
Deductions and Exemptions:
The TCJA increases the standard deduction to $24,000 for married filers and $12,000 for single filers, as well as married taxpayers filing separately. The additional standard deduction for individuals 65 or older, or blind, is retained by the TCJA. The personal and dependent exemptions which were $4,050 per person, have been eliminated.
The TCJA provides that for 2017 and 2018 medical expenses exceeding 7.5% of your adjusted gross income are deductible. Previously the adjusted gross income floor was 10% for most taxpayers. This reduced limit only applies for the 2017 and 2018 tax years.
State and Local Taxes:
The TCJA significantly changes the deduction for state and local taxes. The deduction will be limited to $10,000 for the sum of state and local property taxes as well as state income taxes. However, property taxes paid in carrying on a trade or business will not be subject to the $10,000 cap.
Mortgage Interest Deduction:
Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000. The previous law was $1 million. However, the change only applies to debt incurred on or after December 15, 2017. Moreover, the TCJA eliminates the deduction for any interest paid on home equity debt.
Other Miscellaneous Itemized Deductions:
The TCJA no longer provides for a deduction for miscellaneous itemized deductions, which were formerly deductible to the extent they exceeded 2% of adjusted gross income. This includes items such as legal fees, tax preparation fees, investment expenses, union dues and unreimbursed employee expenses.
Under the TCJA alimony payments entered and/or modified after December 31, 2018, will no longer be deductible by the payor and will not be considered income to the recipient.
Phase Out of Itemized Deductions:
The phase out of itemized deductions for higher income taxpayers has been eliminated by the TCJA. The previous law applied to taxpayers whose adjusted gross income exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which the adjusted gross income exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions.
The TCJA increases the credit for qualifying children to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a $500 credit for taxpayer dependents who are not qualifying children. The income level at which the credit begins to phase out has also been increased allowing more taxpayers to benefit.
Casualty and Theft Losses:
The TCJA eliminates itemized deductions for casualty and theft losses, except for losses incurred in a federal declared disaster. It also eliminates the deduction for job related moving expenses, except for certain military personnel.
The TCJA increases the maximum cash charitable contributions to 60% of adjusted gross income which is an increase of 10% from the current law. As with the current law, charitable contributions more than the 60% threshold will carry forward for 5 years.
Pass Through Income:
The TCJA provides that taxpayers are allowed a deduction equal to 20% of “qualified business income” otherwise known as pass through income, which includes income from sole proprietorships, partnerships, S corporations and limited liability companies. The income must be from a trade or business within the United States. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500, or $315,000 for joint filers, there are limitations based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in. Also, income from the following trades or business is phased out of qualified business income: health law consulting, athletics, financial or brokerage services, or businesses where the principal asset is the reputation or skill of one or more employees or owners.
The TCJA changes tax provisions for children who have earned or unearned income. The new law provides that earned income of a dependent child will be taxed under the rates for single filers and unearned income will be tax according to the brackets applicable to trusts and estates. The previous law provided that unearned income above a statutory amount was taxed at the parent’s marginal rate.
Estate and Gift Taxes:
The TCJA provides that the applicable exclusion for estate gift and generation skipping tax is increased to $11,200,000 per person effective 2018. The exclusion will continue to be inflation adjusted in future years. Furthermore, the portability election which permits a deceased’s spouse to transfer unused exclusions amounts to a surviving spouse is unchanged and rules providing for a step up in cost basis at death for capital assets is also unchanged. Therefore, a married couple with basic planning should be able to transfer up to $22,400,000 with no federal taxes.
As you can see from this overview, the TCJA provides sweeping tax changes. Each taxpayer will need to evaluate what these changes mean and how they can take advantage of any planning opportunities.
If you wish to discuss the impact of the law on your situation, please contact Joseph A. Bellinghieri at (610) 840-0239 or [email protected].
Joseph A. Bellinghieri is an attorney with the Law Firm of MacElree Harvey, Ltd. in West Chester, PA. Joe is a seasoned attorney with over twenty years of experience representing individuals and businesses with a variety of estate, tax, real estate and business issues. Contact Joe at (610) 840-0239 or [email protected].