In late December 2017, the president signed the Tax Cut and Jobs Act--the first major change in the income tax code in over 30 years. The changes affect individual taxpayers with new tax rates and tax brackets, an increased standard deduction, the loss of the personal exemption for dependents, an increasing child tax credit and limitations to tax and interest deductions, for example.
While many provisions of the Act affect businesses, this article focuses on a few of the provisions that will affect individuals in 2018 through 2025. The tax rates and brackets are based on your filing status--single, married filing jointly, married filing separately and head of household. The new act provides seven tax rates, beginning at 10 percent with several brackets as high as 37 percent.
Children who were previously taxed at their parent's tax bracket will now calculate tax on earned income at single taxpayer rates, and unearned income taxed at estates and trusts rates. The alternative minimum tax has been retained for individuals, now with a higher exemption amount.
Significant changes have been made to the rules that affect home ownership. The Act modifies the deductibility of home mortgage interest for primary and second homes purchased on December 15, 2017 or later. (Homes purchased before that date remain subject to the old rules). The new rules reduce the maximum first mortgage loan amount from $1,000,000 down to $750,000 (one-half that amount if married filing separately (MFS)). Tax deductions for property tax, income/sales tax and auto tag tax is now limited to $10,000 ($5,000 MFS). Interest for home equity line of credit debt has been eliminated.
If you are affected by the $10,000 limitation on tax deductions, consider utilizing the State of Alabama program - The Alabama Accountability Act. This Alabama Act provides an opportunity for its taxpayers to make a charitable contribution to a qualified charity for federal purposes and receive a dollar for dollar tax credit on your Alabama tax return.
Medical expense rules were changed to allow for a reduced threshold of 7.5 percent for all taxpayers. Charitable contribution deductions, previously limited to a 50 percent limitation for cash contributions to public charities and some private foundations are increased to 60 percent. However, the new law eliminates the opportunity for a charitable tax deduction for a contribution to a college or university for the right to buy tickets to an athletic event.
The new law changes the taxation and deduction for alimony and separate maintenance agreements modified after December 31, 2018. Payments made under alimony or separate maintenance agreements executed after 2018 will no longer be considered deductible by the payor or income to the payee spouse.
One area of the new law that may affect employees that pay some of their own business expenses is the change in deductibility of miscellaneous expenses. Under the new law, the deduction for any miscellaneous itemized deduction subject to the two percent floor is suspended for tax years after 2017 and before 2026. As a planning opportunity, if you currently have an arrangement with your employer where you pay and deduct these expenses on your form 1040, consider modifying your compensation arrangement with your employer to include having them pay or reimbursing you for them. On a positive note, the loss of itemized deductions if your income level exceeded a threshold has been suspended.
With possible exceptions to some military personnel on active duty, the itemized deduction for moving expenses is eliminated. This includes amounts received directly or indirectly from your employer. Moving expenses paid in connection with a new job greater than 50 miles from the prior place of work to your residence has also been eliminated for most taxpayers.
Significant changes have been made to the child care credit for children under the age of 17. The amount of the credit has doubled from $1,000 to $2,000. The phase out income levels have increased from $110,000 for married taxpayers filing a joint return to $400,000. There is also a new credit for non-child dependents such as parents or children over the age of 17 in the amount of $500 per year.
The new law eliminates the itemized deduction for casualty and theft losses for individuals. This would include losses arising from fire, wind and theft. However, there is an exception for losses which arise in a federally declared disaster area.
The Act modifies the rules for college savings funds (529 plans) allowing distributions to include payments to elementary or secondary institutions for payment up to $10,000 per year. Institutions include public, private and religious operated schools.
There are also significant modifications to the estate and gift tax rules effective during the period from 2018 through 2025. The amount of the estate and gift tax exemption doubles this year from approximately $5.5 Million to $11 Million per decedent.
Many opportunities for planning early in 2018 exist for taxpayers. Taking time in early 2018 to plan, make changes allowed under the new Act, and prepare for your particular situation will allow for better tax results. Be proactive and plan now.
Gerard Kassouf, CPA CFP® is a director in the tax, accounting and advisory firm Kassouf & Co., P.C.