Individual income tax changes
Under the TCJA, the changes that affect individual income tax are in effect only for tax years 2018−2025.
The act modified the marginal rates for individual income taxation. The revised seven-tier income tax rate schedule for tax years 2018−2025 is reflected in the chart below.
|Tax Rate||Single||Married/Jointly||Head of Household||Married/Separately|
|37%||Over $500,000||Over $600,000||Over $500,000||Over $300,000|
In addition to the changes made to the tax brackets, many exemptions and deductions for individual income tax have been modified or repealed.
- The personal exemption of $4,150 per taxpayer and dependent has been eliminated.
- The standard deduction for individuals has been increased from $6,500 for individual taxpayers and $13,000 for married couples who file jointly to $12,000 for individual taxpayers and $24,000 for married couples who file jointly. This near doubling of the standard deduction will result in more taxpayers taking this deduction instead of itemizing.
The legislation places limits on several itemized deductions, listed in the table below.
Changes Under TCJA
State and local income tax,
All deductions for state and local income tax, as well as property tax, limited to a maximum of $10,000
Debt limitation lowered to $750,000 for new mortgages taken out afterDecember 15, 2017
|Deductible to the extent they exceed 7.5% of adjusted gross income (AGI), lowered from the previous threshold of 10% of AGI|
|No longer deductible at the personal or employer level,
except for military
Miscellaneous itemized deductions
|Miscellaneous itemized deductions repealed; no longer deductible|
Income phaseout for itemizing deductions
|No phaseout for itemizing deductions|
Miscellaneous individual income tax changes
In addition to the major modifications discussed above, several other changes in the act may affect your financial decisions going forward. These are:
Family tax credits. The child tax credit has been doubled, from $1,000 to $2,000, and the refundable portion of that credit is allowable up to $1,400. The act also grants a new credit of $500 for other dependents. These will phase out at income limits of $200,000 (single) and $400,000 (married).
Estate and gift taxes. Effective January 1, 2018, the individual unified gift and estate tax exemption has been raised to $11.2 million (up from what was set to be $5.6 million) and, with portability remaining intact, $22.4 million for a married couple. The top rate will remain 40 percent. The new rates are set to expire-and return to 2017 levels-at the end of calendar-year 2025.
Cash donations to charity. Under 2017 law, gifts of cash to charity offered a taxpayer the ability to deduct the contribution, up to 50 percent of AGI. The act has increased the limitation to 60 percent of the taxpayer’s AGI.
Education planning. The act includes an expansion of 529 savings plans that allows families to save for K−12 expenses, in addition to college expenses. 529 plans will also be able to use qualified distributions for elementary and secondary school expenses, up to $10,000 per year, per student.
1031 exchanges. As of January 1, 2018, 1031 exchanges have been limited to real property.
Affordable Care Act individual mandate. The act eliminates the penalty imposed under the IRC for individuals who do not maintain individual health care coverage.
Individual alternative minimum tax (AMT). The individual AMT exemption amount has increased to $70,300 for individual filers and $109,400 for joint filers. The phaseout for the AMT exemption has increased to $500,000 for individuals and $1 million for married couples. With enactment of the act, fewer Americans will be subject to the AMT.
Retirement recharacterizations. Beginning January 1, 2018, the act eliminates the ability for a taxpayer to unwind a Roth conversion and “recharacterize” back to a traditional IRA.
Pass-through business income
Under previous tax law, all pass-through business income was taxed at the individual taxpayer’s marginal rate, as is most ordinary income. Under the TCJA, qualified pass-through business income will be addressed in
a new IRC Section 199A.
The general rule under the TCJA gives pass-through business entities a maximum deduction of 20 percent of the nonwage allocation of qualified business income (QBI) from the trade or business. Butthe deduction may be reduced, or even eliminated, when taxable income exceeds the following limits:
- For individuals:Taxable income over $157,000
- For married couples:Taxable income over $315,000
When the taxpayer’s taxable income exceeds those limitations, the deduction will be the lesser of 20 percent of QBI or the greater of the two amounts produced by running wage and capital tests as follows:
- 50 percent of W-2 wages paid on behalf of the business; or
- The sum of 25 percent of W-2 wages and 2.5 percent of the unadjusted basis of all QBI property (depreciable business property).
Certain service professionals (e.g., attorneys, accountants, financial professionals). If a person’s pass-through entity is in a “specified service business,” the deduction is reduced pro rata for taxable incomes between $157,000 and $207,500 for individual filers and $315,000 and $415,000 for married filing jointly. The deduction is disallowed completely if taxable income exceeds $207,500 for an individual and $415,000 for married taxpayers filing jointly.
Please note: Additional guidance is anticipated from the IRS or the U.S. Department of the Treasury regarding the pass-through taxation deduction.
Although the changes to how individual income is taxed are set to expire at the end of 2025, the corporate tax changes provided for in the TCJA will be permanent. One of the largest tax cuts in the legislation lowers the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Furthermore, the TCJA completely repeals the corporate AMT. The act also imposes some limitations on certain corporate tax deductions, including those for net operating loss, business interest, and R&D expenditures.
Assess where you are headed
In light of these sweeping changes, 2018 should result in a complete review of your financial snapshots. An overall review of income, assets, and balance sheet is important in order to get a clear picture of how the significant changes to individual income taxation will affect you and your family.
More planning opportunities will continue to arise as the new tax code unfolds. Please reach out to your tax professional, or contact our office, for help navigating these changes.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
© 2018 Commonwealth Financial Network®