• Tax Cuts and Jobs Act Review

    Dear Client,

    The Tax Cuts and Jobs Act, which both houses of Congress passed on December 20, 2017, contain a large number of provisions which affect individual taxpayers. However, to keep the cost of the bill within Senate budget rules, all of the changes affecting individuals expire after 2025. At that time, if no future Congress acts to extend the provisions the tax law would revert to its current state.

    Here is a look at many of the provisions in the bill affecting individuals.

    Standard deduction: The act increased the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act.

    Personal exemptions: The act repealed all personal exemptions through 2025.

    Passthrough income deduction: For tax years after 2017 and before 2026, individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income.

    A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold.

    Child tax credit: The act increased the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit is $1,400. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

    Education provisions: The act modifies Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis.

    The act modified the exclusion of student loan discharges from gross income by including within the exclusion certain discharges on account of death or disability.

    Itemized deductions: The act repealed the overall limitation on itemized deductions, through 2025.

    Mortgage interest: The home mortgage interest deduction was modified to reduce the limit on acquisition indebtedness to $750,000 (from the prior-law limit of $1 million).

    A taxpayer who 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 that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that he or she will be allowed the prior-law $1 million limit.

    Home-equity loans: The home-equity loan interest deduction was repealed through 2025

    State and local taxes: Under the act, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes.

    The conference report on the bill specifies taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.

    Casualty losses: Under the act, taxpayers can take a deduction for casualty losses only if the loss is attributable to a presidentially declared disaster.

    Gambling losses: The act clarified the term “losses from wagering transactions” includes any otherwise allowable deduction incurred in carrying on a wagering transaction. This is intended to clarify the limitation of losses from wagering transactions applies not only to the actual costs of wagers, but also to other expenses the taxpayer incurred  in connection with his or her gambling activity.

    Charitable contributions: The act increased the income-based percentage limit for charitable contributions of cash to public charities to 60%. It also denies a charitable deduction for payments made for college athletic event seating rights.

    Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law are repealed through 2025 by the act.

    Alimony: For any divorce or separation agreement executed after Dec. 31, 2018, the act provides that alimony and separate maintenance payments are not deductible by the payer spouse. It repealed the provisions that provided those payments were includible in income by the payee spouse.

    Moving expenses: The moving expense deduction is repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station. This also applies to the moving expense reimbursements.

    Educator’s classroom expenses: The final act did not change the allowance of an above-the-line $250 deduction for educators’ expenses incurred for professional development or to purchase classroom materials.

    Sale of a principal residence: The act did not change the current rules regarding exclusion of gain from the sale of a principal residence.

    IRA recharacterizations: The act excludes conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This is designed to prevent taxpayers from using recharacterization to unwind a Roth conversion.

    Estate, gift, and generation-skipping transfer taxes: 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. The basic exclusion amount increased from $5 million to $10 million and will be indexed for inflation.

    Individual AMT: While the House version of the bill would have repealed the alternative minimum tax (AMT) for individuals, the final act kept the tax, but increased the exemption.

    For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the AMT exemption amount increases 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). The exemption and threshold amounts will be indexed for inflation.

    Individual mandate: The act reduces to zero the amount of the penalty imposed on taxpayers who do not obtain health insurance that provides at least minimum essential coverage, effective after 2018.

    If you have any questions regarding this, please do not hesitate to call our office or email Becky Kissel beckykissel@holtpatterson.com, Julie Fauss juliefauss@holtpatterson.com or Michael Patterson at mikepatterson@holtpatterson.com.