Tax Tips for Individuals
Tax Cuts and Jobs Act -- Individual Provisions
Tax rates. The top tax bracket for individuals will be 37 percent, which kicks in at $600,000 for married filing joint taxpayers and $500,000 for single filers. These brackets sunset for tax years beginning after Dec. 31, 2025. Expect practitioner guidance from Treasury on determining head of household status. The 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax are still intact using their historical thresholds. New income tax brackets include the following ranges:
Married individuals filing joint returns and surviving spouses
Not over $19,050, 10 percent of the taxable income
Over $19,050 but not over $77,400, $1,905 plus 12 percent of the excess over $19,050
Over $77,400 but not over $165,000, $8,907 plus 22 percent of the excess over $77,400
Over $165,000 but not over $315,000, $28,179 plus 24 percent of the excess over $165,000
Over $315,000 but not over $400,000, $64,179 plus 32 percent of the excess over $315,000
Over $400,000 but not over $600,000, $91,379 plus 35 percent of the excess over $400,000
Over $600,000, $161,379 plus 37 percent of the excess over $600,000
Not over $9,525, 10 percent of the taxable income
Over $9,525 but not over $38,700, $952.50 plus 12 percent of the excess over $9,525
Over $38,700 but not over $82,500, $4,453.50 plus 22 percent of the excess over $38,700
Over $82,500 but not over $157,500, $14,089.50 plus 24 percent of the excess over $82,500
Over $157,500 but not over $200,000, $32,089.50 plus 32 percent of the excess over $157,500
Over $200,000 but not over $500,000, $45,689.50 plus 35 percent of the excess over $200,000
Over $500,000, $150,689.50 plus 37 percent of the excess over $500,000
Individual AMT. The Act temporarily increases both the exemption amount and the exemption phase-out thresholds for the individual AMT. Under the provision, for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the AMT exemption amount is increased 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 phase-out 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). These amounts are indexed for inflation.
State and local taxes. The Act limits the combined individual deduction for state and local income taxes, as well as real estate and sales taxes, to an annual cap of $10,000. The last-minute inclusion of income taxes in this computation was a compromise to allow more individuals in high-taxed states to utilize the full $10,000 limitation.
Further, the conference committee report clarifies that taxpayers cannot prepay their 2018 state tax liabilities in order to avoid this limitation.
Mortgage interest. The Act maintains the mortgage interest deduction in its current form, but only for existing mortgages. It reduces the deduction for new mortgages to $750,000 from the current $1 million principal cap. For this purpose, a new mortgage is considered debt incurred after Dec. 15, 2017. Home equity interest is now disallowed, but the interest deduction for second homes is retained.
Refinanced debt would count as having been incurred when it was originally incurred to the extent that the amount is within the original amount.
In addition, the Act provides that a taxpayer who has 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 such residence before April 1, 2018, shall be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision. It is not clear from the legislative text why there is a three-month lag time between closing on the purchase (before Jan. 1, 2018) and purchasing the residence (before April 1, 2018). We are hopeful further guidance will be forthcoming.
Standard deduction and personal exemptions. The standard deduction would increase to $24,000 for joint filers (and surviving spouses) and $12,000 for individual filers; these amounts will be indexed for inflation for tax years after 2018. Single filers with at least one qualifying child would receive an $18,000 standard deduction. However, the Act repeals personal exemptions.
Charitable contributions. For contributions made in tax years beginning after 2017 and before 2026, the 50 percent limitation for contributions to public charities and certain private foundations is increased to 60 percent.
Alimony. Alimony payments would no longer be deductible by the payor or included in the income of the recipient. This repeal would apply to any divorce or separation decree executed after 2018 as well as any modification to an existing agreement made after 2018 if the modification expressly provides for this section to apply.
Expansion of child tax credit. Under the Act, the child tax credit would be increased to $2,000 per qualifying child (up from $1,000). The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. Under the conference agreement, the credit begins to phase out for taxpayers with adjusted gross income in excess of $400,000 (in the case of married taxpayers filing a joint return) and $200,000 (for all other taxpayers). The phase-out thresholds are not indexed for inflation.
Miscellaneous itemized deductions. The Act suspends all miscellaneous itemized deductions that are subject to the 2 percent floor under present law. The provision does not apply for taxable years beginning after Dec. 31, 2025.
Medical expense deduction. The Act provides that, for taxable years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019, the threshold for deducting medical expenses shall be 7.5 percent for all taxpayers. For these years, this threshold applies for purposes of the AMT in addition to the regular tax.
Individual mandate. The individual shared responsibility payment, or individual mandate, under the Affordable Care Act is repealed for months beginning after 2018.
Estate and gift tax. 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. This is accomplished by increasing the basic exclusion amount provided in section 2010(c)(3) of the Code to $10 million from $5 million. The $10 million amount is indexed for inflation occurring after 2011. As a conforming amendment to section 2010(g) (regarding computation of estate tax), the provision provides that the Treasury Secretary shall prescribe regulations as may be necessary or appropriate to carry out the purposes of the section with respect to differences between the basic exclusion amount in effect: (1) at the time of the decedent’s death and (2) at the time of any gifts made by the decedent. The provision is effective for estates of decedents dying and gifts made after Dec. 31, 2017.
For more information on this topic, or to learn how Heemer Klein tax specialists can help, contact our team via the contact page on this website or 586-751-6060.