The new tax reform bill contains a large number of provisions that affect individual taxpayers. H.R. 1, known as the Tax Cuts and Jobs Act, was passed by both houses of Congress on December 20, 2017. Note that in order to stay within Senate budget rules, this bill will expire after 2025; this means if no future Congress extends H.R. 1’s provision, the tax law would then revert back to its current state.
Here is what you need to know about the bill’s provisions impacting individual taxpayers:
These new rates apply to individual taxpayers starting in 2018 through 2025.
Heads of Households
Married Filing Joint
Married Filing Seperately
Estates and Trusts
Standard deduction: The act increased the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act.
Personal exemptions: The act repealed all personal exemptions through 2025. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.
Child Tax Credit
The amount of the child tax credit has been increased to $2,000 per qualifying child. The maximum refundable amount of the credit is $1,400. A new nonrefundable $500 credit has also been created for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.
The act modifies Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis.
The act modified the exclusion of student loan discharges from gross income by including within the exclusion certain discharges on account of death or disability.
The act repealed the overall limitation on itemized deductions, through 2025.
Mortgage interest: The home mortgage interest deduction was modified to reduce the limit on acquisition indebtedness to $750,000 (from the prior-law limit of $1 million).
A taxpayer who entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that he or she will be allowed the prior-law $1 million limit.
Home-equity loans: The home-equity loan interest deduction was repealed through 2025.
State and local taxes: Under the act, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes.
The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
Casualty losses: Under the act, taxpayers can take a deduction for casualty losses only if the loss is attributable to a presidentially declared disaster.
Gambling losses: The act clarified that the term “losses from wagering transactions” in Sec. 165(d) includes any otherwise allowable deduction incurred in carrying on a wagering transaction. This is intended, according to the conference report, to clarify that the limitation of losses from wagering transactions applies not only to the actual costs of wagers, but also to other expenses the taxpayer incurred in connection with his or her gambling activity.
Charitable contributions: The act increased the income-based percentage limit for charitable contributions of cash to public charities to 60%. It also denies a charitable deduction for payments made for college athletic event seating rights. Finally, it repealed the statutory provision that provides an exception to the contemporaneous written acknowledgment requirement for certain contributions that are reported on the donee organization’s return — a prior-law provision that had never been put in effect because regulations were never issued.
Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law are repealed through 2025 by the act.
Medical expenses: The act reduced the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.
Other Provisions for Individuals
Family and Medical Leave: Creates a tax credit for employers providing 2-12 weeks of annual paid family and medical leave, effective through 2019.
Transportation fringe benefits: Eliminates the employer deduction for transportation fringe benefits, effective 2018.
Bicycle commuting reimbursement: Suspends the $20/month exclusion from employee income, effective 2018 through 2025.
Meals: Eliminates the employer
Alimony: For any divorce or separation agreement executed after Dec. 31, 2018, the act provides that alimony and separate maintenance payments are not deductible by the payer spouse. It repealed the provisions that provided that those payments were includible in income by the payee spouse.
Moving expenses: Suspends the individual deduction for work-related moving expenses, effective 2018 through 2025.
Business-related entertainment, amusement, and recreational activities: Eliminates the employer’s deduction for these expenses, effective 2018.
Employee achievement awards: Limits the employer deduction and employee exclusion from income for employee achievement awards, effective 2018.
Archer MSAs: The House bill would have eliminated the deduction for contributions to Archer medical savings accounts (MSAs); the final act did not include this provision.
Educator’s classroom expenses: The final act did not change the allowance of an above-the-line $250 deduction for educators’ expenses incurred for professional development or to purchase classroom materials.
Exclusion for bicycle commuting reimbursements: The act repealed through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.
Sale of a principal residence: The act did not change the current rules regarding exclusion of gain from the sale of a principal residence.
Moving expense reimbursements: The act repealed through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.
IRA recharacterizations: The act excludes conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This is designed to prevent taxpayers from using recharacterization to unwind a Roth conversion.
Estate, Gift, and Generation-skipping Transfer Taxes
The act doubles the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided in Sec. 2010(c)(3) increased from $5 million to $10 million and will be indexed for inflation occurring after 2011.
While the House version of the bill would have repealed the alternative minimum tax (AMT) for individuals, the final act kept the tax, but increased the exemption.
For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the AMT exemption amount increases to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds are increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts will be indexed for inflation.
The act reduces to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain health insurance that provides at least minimum essential coverage, effective after 2018.
If you are unsure about any of the new provisions and how they might affect you, contact Klein Hall CPAs. We are a local accounting firm in Naperville and are committed to serving your personal and business needs.