On Friday, December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The following tax law changes are effective for tax years beginning after December 31, 2017, unless otherwise noted.
INDIVIDUAL INCOME TAX
The law contains a large number of changes affecting individual taxpayers. Depending on the individual circumstances, each taxpayer will be affected differently. All of the changes for individuals will expire for tax years after 2025. We have summarized some provisions that are likely to affect our clients.
Standard Deduction, Exemptions, and Tax Rates
- The standard deduction for 2018 will increase to $24,000 for married filing jointly couples; and to $12,000 for most other taxpayers. This will result in fewer people claiming itemized deductions.
- Individual exemptions for all taxpayers and dependents claimed on a return have been repealed.
- Tax rates for most individuals have been reduced.
- Exemptions for the Alternative Minimum Tax have been increased and permanently adjusted for inflation.
Itemized Deductions
For those individuals who will continue to itemize deductions:
- The income threshold for allowable medical expense deductions has been reduced for 2017 and 2018 to 7.5%. After 2018, the threshold will return to the less beneficial 10% of adjusted gross income;
- Combined state income taxes and local property tax deductions are limited to $10,000;
- Mortgage interest debt limits have been reduced to $750,000 from $1,000,000 for indebtedness incurred after December 31, 2017;
- Home equity debt interest is no longer deductible;
- Miscellaneous deductions exceeding 2% of income, including unreimbursed employee business expenses, tax preparation fees, investment fees, and legal fees, are no longer deductible;
- Limitations on itemized deductions for high-income individuals have been repealed.
Income from Partnerships, S corporations, and Sole Proprietorships
- Individuals engaged in a trade or business who report the income on Schedule C, or have income reported to them on a Schedule K-1, may deduct 20% of the business income, with limitations related to wages.
- There are additional limitations to this deduction for service-oriented businesses.
Other Changes for Individuals
- The child tax credit has been increased to $2,000 per qualifying child, and expanded to include taxpayers at higher income levels (adjusted gross income up to $400,000 for married taxpayers and $200,000 for most other taxpayers).
- For divorce or separation agreements executed after December 31, 2018, alimony is no longer taxable to the recipient, nor is it deductible by the payer. If taxpayers have an existing divorce or separation agreement (pre-2019) that is legally modified, the new rules don’t apply unless the modification expressly provides that the Act rules are to apply.
- Moving expenses are no longer deductible, and moving reimbursements are no longer excludible from income, with the exception of certain members of the armed forces.
- The additional tax for individuals who do not maintain essential minimum health coverage is repealed.
- The estate and gift tax exemption has been increased to $11.2 million, from $5.6 million, for each taxpayer.
While this summary is not comprehensive, we hope it will help you understand upcoming changes to your tax liability. As always, we are available to discuss your circumstances and how this new law may affect you.
Scharf Pera & Co., PLLC 