For individual taxpayers, the new tax law — commonly known as the Tax Cuts and Jobs Act (TCJA) — includes many expected changes, some unexpected ones and some that didn’t make the final cut.
Here are the most important things that individual taxpayers need to know about the TCJA, which was signed into law on December 22, 2017. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.
Changes to Individual Rates and Brackets
For 2018 through 2025, the TCJA retains seven tax rate brackets, but six of the rates are lower than before. The tax brackets for ordinary taxable income are as follows:
|Single||Married, Filing Jointly||Head of Household|
|10% tax bracket||$0 – $9,525||$0 – $19,050||$0 – $13,600|
|Beginning of 12% bracket||$9,526||$19,051||$13,601|
|Beginning of 22% bracket||$38,701||$77,401||$51,801|
|Beginning of 24% bracket||$82,501||$165,001||$82,501|
|Beginning of 32% bracket||$157,501||$315,001||$157,501|
|Beginning of 35% bracket||$200,001||$400,001||$200,001|
|Beginning of 37% bracket||$500,001||$600,001||$500,001|
In 2026, the rates and brackets that were in place for 2017 are scheduled to return.
Taxes on Long-Term Capital Gains and Dividends
The TCJA retains the current tax rates on long-term capital gains and qualified dividends. For 2018, the rate brackets for adjusted net capital gains are:
|Single||Married, Filing Jointly||Head of Household|
|0% tax bracket||$ 0 – $38,599||$0 – $77,199||$0 – $51,699|
|Beginning of 15% bracket||$38,600||$77,200||$51,700|
|Beginning of 20% bracket||$425,800||$479,000||$452,400|
Adjusted net capital gains are net capital gains plus qualified dividends less gains required to be taxed at 25% and 28%. These brackets are almost the same as what they would have been under prior law. The only change is the way the 2018 inflation adjustments are calculated.
Individual Alternative Minimum Tax (AMT)
Despite discussion by Congress to repeal the individual AMT, the new law retains it. But, starting in 2018, the exemption deductions will increase significantly and the exemptions will be phased out at much higher income levels.
Under prior law, the AMT exposure for many individuals was caused by high itemized deductions for state and local taxes and multiple personal and dependent exemption deductions. Those tax breaks are disallowed under the AMT rules.
Under the new law, many individuals who owed the AMT under prior law will be off the hook in 2018. Why? In addition to higher AMT exemption deductions and higher exemption phaseout thresholds, the TCJA 1) limits deductions for state and local taxes, and 2) eliminates personal and dependency exemptions.
Standard Deduction and Personal and Dependency Exemptions
A big decision for individual taxpayers will be: Should I itemize deductions or take the standard deduction? Under the new law, many more taxpayers are likely to take the standard deduction, rather than itemize deductions. Why? The TCJA significantly increases the standard deduction amounts, starting in 2018, to:
- $12,000 for singles (up from $6,350 for 2017),
- $24,000 for married couples who file jointly (up from $12,700 for 2017), and
- $18,000 for heads of households (up from $9,350 for 2017).
Additional standard deduction amounts for elderly and blind individuals are still allowed.
Unfortunately, the TCJA eliminates personal and dependency exemptions. (Under prior law, personal and dependency exemptions would have been $4,150 each for 2018.)
Deductions for State and Local Taxes
Under prior law, if you itemize deductions, you’re allowed to deduct an unlimited amount of personal state and local income and property taxes. You also have the option of forgoing any deduction for state and local income taxes and, instead, deducting state and local general sales taxes.
Starting in 2018, the TCJA limits the deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 for married people who file separately). Foreign real property taxes can no longer be deducted. However, you can still opt to deduct state and local general sales taxes instead of state and local income taxes.
Important note: The TCJA specifically says that you can’t claim a 2017 deduction for prepaid state or local income taxes that are imposed for a tax year beginning after December 31, 2017. The IRS has also issued an advisory stating that prepayments of anticipated property taxes that haven’t been assessed prior to 2018 aren’t deductible in 2017. In addition, prepaying state and local property taxes to lower your tax bill for 2017 could backfire if you are subject to the AMT.
Tax Breaks for Homeowners
Under prior law, individual taxpayers are allowed to deduct interest on up to $1 million of mortgage debt to buy a first or second residence. The mortgage debt ceiling is reduced to $500,000 for married people who file separately. Under prior law, individuals could also deduct interest on up to $100,000 of home equity debt.
Starting in 2018, the TCJA allows you to deduct interest on up to only $750,000 of mortgage debt incurred to buy a first or second residence ($375,000 for those who use married filing separately status). However, this change doesn’t affect home acquisition mortgages taken out under binding contracts in effect before December 16, 2017, as long as the home purchase closes before April 1, 2018.
So, the limits allowed under the prior law ($1 million or $500,000 for married people who file separately) continue to apply to home acquisition mortgages that were taken out when the prior law was in effect — even if these loans are refinanced after 2017 (as long as the refinanced loan principal doesn’t exceed the old loan balance at the time of the refinancing).
What about home equity loan interest? Starting in 2018, the TCJA eliminates the provision that allows interest deductions on up to $100,000 of home equity loan balances.
In addition, the TCJA preserves the home sale gain exclusion. This valuable tax break allows you to potentially exclude from federal income tax up to $250,000 of gain from a qualified home sale, or $500,000 if you’re married and file jointly. Both the House and Senate versions of the tax bill originally included restrictions related to this break, but none of the proposed changes made the final cut.
Medical Expense Deductions
The new law expands the deduction for medical expenses to cover costs in excess of 7.5% of adjusted gross income (AGI) for 2017 and 2018. (Under prior law, the threshold for deducting medical expenses was 10% of AGI.) After 2018, the deduction threshold is scheduled to return to 10% of AGI.
Education Tax Breaks
The TCJA leaves all of the existing education-related tax breaks in place. It also allows you to take tax-free distributions of up to $10,000 per year from a Section 529 plan to cover tuition at a public, private, or religious elementary or secondary school, starting in 2018.
Child and Dependent Tax Credits
Under prior law, many households were ineligible for the $1,000 child tax credit, because they made too much money. But next year, more families will be eligible for this credit — which will help offset the elimination of the dependency exemptions — and it will double.
Starting in 2018, the maximum child tax credit increases to $2,000 per qualifying child, and up to $1,400 can be refundable. (In other words, lower-income taxpayers can collect up to that amount even if they don’t owe any federal income tax.) The income levels at which the child tax credit is phased out will also increase significantly (to $400,000 for married couples who file jointly). So, almost all taxpayers with under-age-17 children will qualify for this break. In addition, a new $500 nonrefundable credit is allowed for qualified dependents, such as:
- A qualifying 17- or 18-year-old,
- A full-time student under age 24,
- A disabled child of any age, and
- Other qualifying (nonchild) relatives if all the requirements are met.
Roth Conversion Reversals
Starting in 2018, you won’t be able to reverse the conversion of a traditional IRA into a Roth account. Under prior law, you had until October 15 of the year after an ill-advised conversion to reverse it and thereby avoid the conversion tax bill.
The TCJA represents a major tax overhaul. It will take time and effort to understand its full effect on your personal tax situation. Your tax advisor can help you take advantage of beneficial changes and avoid pitfalls. And stay tuned for more articles about additional aspects of the new law.
|Other Noteworthy News
The Tax Cuts and Jobs Act is 479 pages long and covers a lot of ground. Here are some lesser-known aspects of the new law that might affect you personally.
Adoption. The TCJA retains the tax breaks for adoption expenses.
Alimony. Starting in 2019, taxpayers can no longer deduct alimony payments if they’re required to by a divorce agreement entered into after December 31, 2018. Recipients of affected alimony payments will no longer have to include them in taxable income, as they currently do. (The current tax treatment stays in place for divorce agreements entered into on or before December 31, 2018, however.)
Gift and estate taxes. Starting in 2018, the unified federal gift and estate tax exemption will increase to roughly $11.2 million or $22.4 million for a married couple.
“Green” vehicles. The TCJA retains the tax credit of up to $7,500 for new qualified plug-in electric vehicles.
Moving expenses. Starting in 2018, deductions for most miscellaneous itemized expenses and moving expenses (with an exception for members of the military in certain circumstances) are eliminated. Tax-free employer reimbursements for moving expenses are also eliminated.
Personal casualty and theft losses. Starting in 2018, itemized deductions for personal casualty and theft losses are eliminated, except for personal casualty losses incurred in federally declared disaster areas.