Summary of Key Individual Tax Provisions of the Tax Cuts and Jobs Act
After all the talk and speculation, tax reform has finally come (subject to House and Senate vote and the President’s signature). The following is a summary of some of the key provisions of the Tax Cuts and Jobs Act along with some tax planning tips.
Individual Tax Rates:
The top individual rate would be 37 percent for individuals earning $500,000 and above and joint filers earning at least $600,000. There will be seven tax brackets total—10, 12, 22, 24, 32, 35, and 37 percent. The rates expire in 2026 and then revert back to the current rate structure unless extended by Congress.
The plan will increase the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation for tax years after 2018. The additional standard deduction for the elderly and the blind is not changed. All increases will end after December 31, 2025.
The personal exemption amount ($4,050 for 2017) is repealed for tax years starting in 2018, but only through 2025.
State and Local Tax Deduction:
Taxpayers could deduct up to a total of $10,000 of state and local taxes paid—property taxes and either income or sales taxes. Under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
Tax Planning Tip:
Maximize your 2017 deduction by pre-paying your 1st quarter property tax bill and paying the balance of your 2017 state income taxes before the end of the year. This strategy will only work if you are not subject to the Alternative Minimum Tax so please check with your Prager Metis advisor before you make any payments.
Mortgage Interest Deduction:
The bill limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), for tax years beginning after December 31, 2017, and before January 1, 2026. For acquisition indebtedness incurred before December 15, 2017, the current-law limitations of $1,000,000 ($500,000 in the case of married taxpayers filing separately) remain. However, no interest deduction is allowed for interest on home equity indebtedness for tax years beginning after December 31, 2017, and before 2026.
The conference agreement provides that a taxpayer who has entered into a binding written contract
before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, shall be considered to have incurred acquisition indebtedness prior to December 15, 2017 under this provision.
Tax Planning Tip:
Prepay your Jan. 2018 mortgage payment or home equity interest by Dec 31, 2017.
Miscellaneous itemized deductions.
The bill repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.
Tax Planning Tip:
Where practical, accelerate payment of your miscellaneous itemized deductions including a retainer payment for your 2018 personal tax return.
Lowering the threshold for the deduction to 7.5 percent AGI, for tax years 2017 and 2018 for all taxpayers.
Child Tax Credit:
The child tax credit would be increased to $2,000 per child with up to $1,400 of it being refundable.
The bill generally suspends the deduction for moving expenses for taxable years 2018 through 2025. However, during that suspension period, the provision retains the deduction for moving expenses and the rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station. The suspension of the deduction for moving expenses does not apply to taxable years beginning after December 31, 2025.
The bill repeals the deduction for alimony payments and the inclusion in the income of the recipient to any divorce or separation instrument executed after December 31, 2018.
Tax Planning Tip:
If you are currently negotiating a divorce and will be receiving alimony, push the settlement off to 2019. If you are currently negotiating a divorce and will be paying alimony, accelerate the settlement to close before 12/31/2018.
The amendment modifies section 529 plans to allow such plans to distribute not more than $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Thus, under the provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of tax, regardless of whether the funds are distributed from multiple accounts. Any excess distributions received by the individual would be treated as a distribution subject to tax under the general rules of section 529.
Deduction for Personal Casualty and Theft Loss:
The bill temporarily modifies the deduction for personal casualty and theft losses. Under the provision, a taxpayer may claim a personal casualty loss (subject to the limitations) only if such loss was attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The limitation does not apply with respect to losses incurred after December 31, 2025.
Pass-through entity owners that meet certain conditions would be eligible for a 20 percent deduction on their business income. Pass-through owners who file jointly and earn at least $315,000 ($157,500 for single filers) in business profits are subject to limitation on the deduction. The restriction is based on how much the pass-through pays in wages or invests in equipment and machinery. Service businesses, such as law and accounting firms, are eligible for the deduction if owners are under the threshold. The deduction will expire in 2026.
For business income over the threshold, the limitation is the lesser of (a) 20% of the taxpayer's qualified business income with respect to the trade or business, or (b) the greater of 50% of the W-2 wages with respect to the trade or business or the sum of 25% of the W-2 wages with respect to the trade or business and 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.
Tax Planning Tip:
Look for opportunities to convert wages or other compensation for personal services to income eligible for the 20% deduction. Because of the limits that apply, please contact your Prager Metis advisory to determine if the strategy will work for you.
Alternative Minimum Tax:
The conference agreement temporarily increases both the exemption amount and the exemption amount phaseout thresholds for the individual AMT. Under the provision, for taxable years beginning after December 31, 2017, and beginning before January 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 phaseout thresholds are increased to $1,000,000 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.
Estate and gift taxes.
The bill doubles the estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The exemption goes to approximately $11 million for individuals and $22 million for joint filers and is indexed for inflation.
Tax Planning Tip:
Consider making gifts (including generation skipping gifts) in 2018 as these provisions may be reversed at some point prior to 2026.
The above summary highlights only some of the many provisions contained in the Tax Cuts and Jobs Act. There are many other provisions affecting individual, business and international taxes. While the current tax reform legislation makes tax planning a challenge, there are steps taxpayers can take now to mitigate some of the negative changes they may face in the future. Each individual situation is unique, and it is important to consult with your Prager Metis advisor to decide on the best course of action for you.