The “Tax Cuts and Jobs Bill” – Individual Tax Provisions
This bill is the largest tax bill since the Tax Reform Act of 1986, which introduced the passive activity loss and many other fundamental rules.
The House and Senate approved the bill on Wednesday, December 20 on a party-line vote and then signed by President Trump on December 22, 2017.
Following are the details of the final conference committee bill, reconciling the Senate and House bills. All effective dates are January 1, 2018, unless otherwise noted. All individual tax provisions expire on December 31, 2025, unless otherwise noted.
Individual Tax Provisions
- Current Rule
- For ordinary income, seven graduated tax rates apply to individuals – 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- The special long-term capital gains and qualified dividends, the rate is 0% for a taxpayer otherwise in the 10% or 15% rate. For taxpayers otherwise, in the 25% to 35%, the special rate is 15%. For those in the top 39.6% rate, the special rate is 20%.
- This Bill
- Seven rates will be retained, but adjusted downward somewhat – 10%, 12%, 22%, 24%, 32%, 35%, and 37%. More notably than the rate brackets are the size of the brackets – the amount of income subject to each one. Note that there are two rates in the teens, then a large jump into the twenties, then a large jump into the thirties. Estates and trusts will face four rate brackets of 10%, 24%, 35%, and 38.5%.
- The House provision had included for a recapture of the benefit of the lower rates for those with incomes over $1,000,000 – that provision is NOT in the final bill.
- Present law for capital gains and qualified dividends rates are retained, and so is the level of income to which they apply.
- Here is a comparison of married filing jointly rates for 2018, showing the changes in the size of the tax brackets:
|Current Law||Conference Agreement|
|Income Range||Rate||Income Range||Rate|
|Up to $18,650||10%||Up to $19,050||10%|
|$18,650 – $75,900||15%||$19,050 – $77,400||12%|
|$75,900 – $153,100||25%||$77,400 – $165,000||22%|
|$153,100 – $233,350||28%||$165,000 – $315,000||24%|
|$233,350 – $416,700||33%||$315,000 – $400,000||32%|
|$416,700 – $470,700||35%||$400,000 – $600,000||35%|
|Over $470,700||39.6%||Over $600,000||37%|
- Current Rule Single and married-filing-separately – $6,500; Married-filing-jointly – $13,000; Head of household –$9,550. (2018 amounts)
- This Bill Single and married-filing-separately – $12,000; Married-filing-jointly – $24,000; Head of household – $18,000
- Observation Bill-writers believe that the large increase in the standard deduction, coupled with the restriction on itemized deductions, will result in 90% of taxpayers being able to avoid itemizing. Also, this cushions the blow for many specific itemized deductions that have been eliminated. The higher standard deduction and the limitation on certain types of itemized deductions will bring back “bunching” of deductions, meaning that you would count on claiming the standard deduction every other year, and deferring or accelerating itemized deductions such as property taxes and charitables into the other years.
- Current Rule An exemption from tax applies to $4,050 of income, for each the taxpayer, spouse, and any dependents.
- This Bill Repealed.
- Observation Bill-writers say that the much larger standard deduction and an expanded child tax credit will address this loss, with simplification as a side effect.
Child Tax Credit
- Current Rule A credit of $1,000 per dependent child under age 17 is allowed. The credit phases out beginning at $75,000 of single income ($110,000 joint).
- This Bill Increases the credit to $2,000 per child and allows up to $1,400 of that to be refunded if the credit is in excess of tax owed. The credit will phase out starting at adjusted gross income (“AGI”) of $400,000 joint and $200,000 for all other taxpayers. Also, an additional credit of $500 is allowed for certain non-child dependents.
- Observation The increased phase-outs and credit amount will make the credit much more valuable to taxpayers than under current law.
Roth IRA Recharacterizations
- Current Rule Recharacterizations of Roth conversions (or undoing the taxable Roth conversion) can be done by the due date of the tax return, including extensions. This is an exceptional opportunity to change one’s mind about a taxable event, well after the tax year.
- This Bill Removes the ability to recharacterize a Roth conversion. The language in this bill is clear that the taxpayer and/or spouse retains the ability to change his/her mind about whether an IRA contribution for that year is for a regular or Roth IRA, before the following April 15. Roth conversions are still allowed, but the decision to convert cannot be undone for tax years after 2017.
- Current Rule If certain tests are met, alimony paid is a deduction for the payor (without having to itemize) and alimony received is income for the recipient.
- This Bill Provides that alimony received is not income and alimony paid is not deductible, for any divorce or separation instrument executed after 12/31/2018, or a pre-existing one that is modified after this date.
- Current Rule The deduction for certain moving expenses are deductible if certain tests are met. Employer reimbursements for said expenses are not income.
- This Bill Removes the deduction and provides that any reimbursements are taxable income unless the move is for members of the Armed Forces pursuant to a military order to a change of station.
- Current Rule Popular itemized deductions include –
- medical expenses,
- state and local taxes (sales or income, but not both),
- real estate taxes,
- charitable contributions,
- casualty losses,
- unreimbursed employee expenses and tax preparation expenses, and
- mortgage interest expense. Here, you can deduct interest on up to $1,000,000 of acquisition debt on a principal residence and one second home, plus interest on up to $100,000 of home equity debt from whatever source.
- This Bill
- For 2017 and 2018 only, medical expenses are deductible to the extent they in total exceed 7.5% of AGI (currently 10%). After 2018, the medical deduction floor returns to 10%.
- Personal itemized deductions for state and local property taxes plus (1) state and local income taxes or (2) state and local sales taxes remain deductible subject to a cap of $10,000 per year. This rule specifically does not allow the deduction in 2017 for a payment of income tax for a period after 2018, thereby preventing a prepayment of future income tax liability in order to circumvent this limitation.
- Beginning in 2018, the maximum debt on a first or second residence which brings a mortgage interest deduction is reduced to $750,000. If the debt was incurred before 12/15/2017, the prior debt limit of $1,000,000 remains available. This debt is that of the principal residence and one additional home.
- The deduction of interest on up to $100,000 of home equity debt is not allowed after 12/31/2017 unless the equity debt was used for the purchase or improvement of a principal or a second residence. No other use will qualify.
- Several changes are made in the deduction of charitable contributions –
- Cash contributions to public charities are deductible up to 60% of adjusted gross income (currently 50%).
- No charitable contribution is allowed for payments to an educational institution which conveys athletic ticket purchase or seating rights (currently 80% deductible by rule).
- Personal casualty losses will be deductible only if it is due to a federally-declared disaster.
- All miscellaneous 2% itemized deductions are repealed. These include tax preparation fees, job hunting expenses, unreimbursed employee business expenses, safe deposit box fees, losses on IRA accounts, IRA trustee fees, union dues, and investment management expenses.
Alternative Minimum Tax
- Current Rule Imposed on all taxpayers. There is an exemption from the AMT of $84,500 for taxpayers married-filing-jointly, $54,300 single, $42,250 married-filing-separately, and $24,100 for an estate or trust. The ability to use this exemption to prevent the imposition of the AMT phases out beginning at AMT income of $160,900 for taxpayers married-filing-jointly, $120,700 for singles, and $80,450 for those married-filing-separately and for estates and trusts.
- This Bill Increases the exemption from the AMT to $109,400 married-filing-jointly, and $70,300 for all other taxpayers. Perhaps more importantly, the exemption phases out beginning at $1 million married-filing-jointly and $500,000 for all other taxpayers. These amounts are indexed in the future for inflation.
- The significant increase in the phase-out range will result in the AMT exemption being much more valuable to many of our clients.
- While the AMT is not repealed, it will be considerably less of a problem since the primary factors that bring on the AMT for middle-class taxpayers (personal exemptions, state and local taxes deducted, miscellaneous itemized deductions) are all repealed, and the AMT exemption will be much more valuable.
Estate and Gift Tax
- Current Rule Estates over $5.5 million ($11 million married) are taxed at 40% of the excess. Lifetime gifts are taxed against this same limitation.
- This Bill Increases the exemption to $10 million and indexes it for inflation after 2011. The current amount is $5 million, indexed for inflation after 2011, so the effect of this change is to effectively double the exemption. The gift tax remains.
- Observation The estate tax currently affects only 0.2% of taxpayers under the present system.
- Kiddie Tax Income tax for investment income of children is taxed at the parents’ tax rates.
- This Bill Provides that the single tax rates apply to earned income, but the rates for estates and trusts apply to investment income.
- Limitation of Total Itemized Deductions Currently, where upper-income individuals claim itemized deductions, total itemized deductions can be reduced by up to 80% based on the level of adjusted gross income. This is also known as the “Pease” limitation.
- This Bill Repeals this limitation entirely.
- Student Loan Debt Currently discharged student loan debt is included in income except in specific situations.
- This Bill Expands the list of nontaxable loan discharges to include death and/or disability.
- Section 529 College Savings Plans Currently, the plans can accept contributions (not deductible) which grow tax-deferred. If used to pay for qualifying higher education expenses (“QHEEs”), the deferred income becomes tax-free income. QHEEs are tuition, fees, books, supplies, and equipment required for enrollment or attendance. If the student is at least half-time, QHEEs include room and board. QHEEs include the purchase of computer equipment and internet access needed for education.
- This Bill
- Expands the list of QHEEs to include up to $10,000 per year for enrollment or attendance at a K-12 public, private, or religious school.
- Allows 529 plans to be rolled tax-free to ABLE accounts for the support of disabled individuals.
- This Bill
- ABLE Account Contributions Tax-free account if withdrawals are used for support of the disabled. Annual contributions from all sources are limited to the annual gift tax exclusion ($14,000 for 2017, $15,000 for 2018).
- This Bill Increases the amount that the beneficiary can contribute for themselves, in addition to the annual gift amount, to the lesser of (1) the federal poverty line for a one-person household, or (2) the individual’s compensation for the year. Additionally, the beneficiary is eligible to claim the saver’s credit for contributions to their own ABLE account.
- Penalty for Failure to Maintain Health Coverage Currently, taxpayers must pay a penalty for failure to maintain minimum essential health coverage.
- This Bill Retains the requirement but sets the penalty at zero.
Individual tax items which are retained in the current law (not repealed) despite discussions of repeal in either the House or Senate versions:
- Credit for the elderly and permanently disabled is retained.
- Credit for electric vehicles is retained.
- Credit for mortgage certificates is retained.
- The Lifetime Learning credit is retained, and the existing rules of the American Opportunity tax credit are retained.
- The deduction for tuition expenses is retained.
- The ability to specifically identify securities lots sold (not forced to assume that the oldest securities held are the ones sold) is retained.
- The deduction for student loan interest is retained.
- The exclusion from income of employer qualified tuition programs is retained.
- The exclusion from income of US savings bond interest used for higher education is retained.
- The itemized deduction for medical expenses is retained.
- The deduction for contributions to Archer Medical Savings Accounts (“MSAs”) is retained.
- The deduction for up to $250 of unreimbursed teacher expenses is retained.
- The exclusion from income for the value of housing provided for the convenience of the employer is retained.
- The existing rules for the sale of a principal residence, including extending the holding period and exclusion amounts, are retained in full. No changes are made.
- The credit for adoption expenses, and the exclusion of employer adoption assistance are retained.
- The exclusion from income of tuition reductions for graduate students is retained.
Please contact us if you have any questions.