Individual Tax Reform

3rd January 2018

2017 Tax Reform: Individual Tax Changes

On Wednesday, December 20, 2017, Congress passed H.R. 1, commonly known as the Tax Cuts and Jobs Acts, which will completely overhaul the current tax law. President Trump signed the law into existence on December 22, 2017. Most changes would begin in the 2018 tax year unless otherwise noted. Below are some of the changes to individual income taxes.

Changes to Tax Rates & Brackets

The bill would keep the same number of tax brackets at seven, but will change the rates of taxable income. Currently, the tax rates range from 10% to 39.6%, but the new bill would only go from 10% to 37%. The new bill will also extend the tax brackets. Under the old tax law, a married couple would be in the 28% tax bracket beginning at taxable income of $153,100. However, under the new bill, that married couple would be in the 24% tax bracket with the same taxable income. Below is a table of the tax rates and the income levels that they begin:

Single Taxpayers

Income Level Tax Rate
$0 - $9,525 10%
$9,526 - $38,700 12%
$38,701 - $82,500 22%
$82,501 - $157,500 24%
$157,501 - $200,000 32%
$200,001 - $500,000 35%
$500,001+ 37%

Married Filing Joint Taxpayers

Income Level Tax Rate
$0 - $19,050 10%
$19,051 - $77,400 12%
$77,401 - $165,000 22%
$165,001 - $315,000 24%
$315,000 - $400,000 32%
$400,001 - $600,000 35%
$600,000+ 37%

Under the Act, capital gains would be taxed at 0% for income levels under $77,200 for married taxpayers (half of the joint amount for single taxpayers), 15% for income levels under $479,000 for married taxpayers (half for single taxpayers), and 20% for income levels above those thresholds.

Increase in Standard Deduction & Elimination of Personal Exemptions

The Act would increase the standard deduction to $24,000 for joint filers, $18,000 for head of household filers, and $12,000 for single filers. The Act would also repeal the deduction for personal exemptions, which is scheduled to be $4,150 per exemption.

Pass-Through Income from Partnerships, S Corporations, and Sole Proprietorships

The Act allows a 20% deduction in business income for all small business pass-throughs. This includes partnerships, S Corporations, and sole proprietorships. This 20% deduction is not allowed in computing adjusted gross income, but rather is allowed as a deduction reducing taxable income. There are limitations. The deduction cannot exceed the greater of 50% of the W-2 wages with respect to the qualified trade or business. There are special rules for specified service businesses that may not be able to take the deduction.

Changes to the Child Tax Credit

The Act would allow the child tax credit to increase from $1,000 to $2,000. This credit would begin to phase out at income levels above $400,000 for married couples and $200,000 for single filers. This credit would be refundable up to $1,400 per qualifying child. In addition, the Act allows for a $500 nonrefundable credit for non-child dependents.

Changes to Itemized Deductions

Under current law, mortgage interest, subject to a $1 million mortgage cap, can be included in itemized deduction. However, under the Act, the cap would be limited to $750,000 for any acquisition indebtedness incurred after December 15, 2017. The Act would suspend the deduction on home equity indebtedness.

State and local income taxes and state and local property taxes will now be limited to a maximum deduction of $10,000 for individuals.

The threshold for medical expense deductions between January 1, 2017 and December 31, 2018 will be reduced to 7.5% of adjusted gross income for all taxpayers. Under current law, this threshold is 10% for taxpayers under the age of 65.

Charitable contributions would increase from the 50% limitation under Section 170 for cash contributions to public charities and certain private foundations to 60%.

The personal casualty and theft loss deduction has been suspended, except for personal casualty losses incurred in a federally-declared disaster.

The deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. This includes the deduction for tax preparation fees and employee business expenses.

Changes to Income and Above-The-Line Deductions

Under the new law, the alimony deduction would be repealed for any divorce or separation agreements executed after December 31, 2018. For divorces after this date, alimony would be paid out of after-tax dollars and would be tax-free to the recipient.

The deduction for moving expenses would be suspended under the new Act.

Alternative Minimum Tax Retained with Higher Exemption Amounts

The Act increases the AMT exemption amount for married filers to $109,400 and single taxpayers to $70,300, up from the current levels of $84,500 for married couples and $54,300 for single taxpayers.

Estate & Generation-Skipping Transfer Taxes

The Act doubles the base estate and gift tax exemption amount from $5 million to $10 million.

Repeal of Obamacare Individual Mandate

The Act reduces the amount of individual shared responsibility payments to zero. Under previous law, the Affordable Care Act required individuals who were not covered by a health plan that provided at least minimum essential coverage to pay a shared responsibility payment (penalty) with their tax return.

If you have any questions, please feel free to contact David Zajac at The Ten Key Group at (234) 334-1966.