As you have no doubt been hearing, there was recent major tax changes effective for 2018 and periods after under the major piece of tax legislation called the Tax Cuts and Jobs Act (the Act). While it was very comprehensive in nature, it was not true tax reform or simplification. Some of the law simplifies things for some but complicates it more for others. Some taxpayers will see tax increases while some will see tax decreases. Below I am including the parts of the Act that will effect most individual taxpayers. These tax law changes will not affect your tax on the return you will soon file for 2017, however they will almost immediately affect the amount of your wage withholding and the amount, if any, of estimated tax that you may need to pay for 2018. Determining the overall impact on any particular individual or family will depend on a variety of the changes made by the Tax Cuts and Jobs Act, including lower tax rates at many levels, increases in the standard deduction, loss of personal and dependency exemptions, a dollar limit on itemized deductions for state and local taxes, and changes to the child tax credit and the taxation of a child’s unearned income, known as the Kiddie Tax.
Rate changes for individuals. Individuals are subject to income tax on “ordinary income,” such as compensation, and most retirement and interest income, at increasing rates that apply to different ranges of income depending on their filing status (single; married filing jointly, including surviving spouse; married filing separately; and head of household). Currently those rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Beginning with the 2018 tax year and continuing through 2025, there will still be seven tax brackets for individuals, but their percentage rates will change to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Capital gain rates. Three tax brackets currently apply to net capital gains, including certain kinds of dividends, of individuals and other non-corporate taxpayers: 0% for net capital gain that would be taxed at the 10% or 15% rate if it were ordinary income; 15% for gain that would be taxed above 15% and below 39.6% if it were ordinary income, or 20% for gain that would be taxed at the 39.6% ordinary income rate.
The Act, generally, keeps the existing rates and breakpoints on net capital gains and qualified dividends. For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, and $425,800 for any other individual (other than an estate or trust).
Standard or itemized deductions. Taxpayers are allowed to reduce their adjusted gross income (AGI) by the standard deduction or the sum of itemized deductions to determine their taxable income. Under pre-Act law, for 2018, the standard deduction amounts, indexed to inflation, were to be: $6,500 for single individuals and married individuals filing separately; $9,550 for heads of household, and $13,000 for married individuals filing jointly (including surviving spouses). Additional standard deductions may be claimed by taxpayers who are elderly or blind. Per the new law, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.
Itemized deduction changes. Under pre-Act law, taxpayers were able to deduct state and local property taxes, and when applicable sales tax, in whatever amounts they paid in a calendar year. With the new law, taxpayers may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for these taxes. Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deduction (unreimbursed employee business expenses, safe deposit fees, investment fees) to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income. Under the new law, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended meaning there is no deduction for these items. In the area of medical deductions, a deduction is allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents to the extent the expenses exceed a threshold amount. To be deductible, the expenses may not be reimbursed by insurance or otherwise. If the medical expenses are reimbursed, then they must be reduced by the reimbursement before the threshold is applied. Under pre-Act law, the threshold was generally 10% of adjusted gross income (AGI). Under the new law, for tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshold on medical expense deductions is reduced to 7.5% for all taxpayers. The threshold will again rise to 10% of AGI beginning with 2019.
Personal exemptions. Under pre-Act law, taxpayers determined their taxable income by subtracting from their adjusted gross income any personal exemption deductions. Personal exemptions generally were allowed for the taxpayer, the taxpayer’s spouse, and any dependents. The amount deductible for each personal exemption was scheduled to be $4,150 for 2018, subject to a phase out for higher earners. Per the new law, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.
Child tax credit. Under pre-Act law, a taxpayer could claim a child tax credit of up to $1,000 per qualifying child under the age of 17. The aggregate amount of the credit that could be claimed phased out by $50 for each $1,000 of AGI over $75,000 for single filers, $110,000 for married filers, and $55,000 for married individuals filing separately. To the extent that the credit exceeded a taxpayer’s liability, a taxpayer was eligible for a refundable credit (i.e., the additional child tax credit) equal to 15% of earned income in excess of $3,000 (the “earned income threshold”). A taxpayer claiming the credit had to include a valid Taxpayer Identification Number (TIN) for each qualifying child on their return. In most cases, the TIN is the child’s Social Security Number (SSN), although Individual Taxpayer Identification Numbers (ITINs) were also accepted.
Per the new law, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. Also, no credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child’s SSN. And finally, something new the law provides is a $500 nonrefundable credit is provided for certain non-child dependents.
As you can tell, the changes are many and there is much to consider for your 2018 year. I hope this information is helpful and we will discuss it during 2018 as it applies to your particular situation.