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In 2017 Congress passed major tax reform legislation, known as the Tax Cuts and Jobs Act of 2017 (TCJA). The changes relating to the Act’s provisions will affect the tax returns of almost every single taxpayer. These changes, however, are temporary in nature and generally apply beginning in 2018 and ending on December 31, 2025. Accordingly, most of the provisions of the Act applicable to individual taxpayers will expire in 2026.
New Individual and Capital Gains Tax Rates
The Act maintains the current seven individual tax brackets but generally reduces the applicable tax rates. The new individual tax rates for 2018 are as follows:
- For married taxpayers filing joint tax returns, or for surviving spouses using the Qualifying Widow(er) filing status, the rate ranges from 10% on income up to $19,050, to 37% for income of $600,000 and above.
- For taxpayers filing Head of Household, the rate ranges from 10% on income up to $13,600, to 37% for income of $500,000 and above.
- For single taxpayers, the rate ranges from 10% on income up to $9,525, to 37% for income of $500,000 and above.
- For married taxpayers using the Married filing Separately filing statue, the rate ranges from 10% on income up to $9,525, to 37% for income of $300,000 and above.
For capital gains taxes, the new tax act generally continues the maximum tax rate imposed on net capital gain and qualified dividends. Accordingly, net long-term capital gain and qualified dividends are generally taxed at 0%, 15% or 20% depending on taxable income and filing status as shown in below:
- Married Filing Jointly and Qualifying Widow(er): 0% for taxpayers earning taxable income up to $77,200; 15% for taxable income between $77,200 and $479,000; 20% for taxable income over $479,000.
- Head of Household: 0% for taxpayers earning taxable income up to $51,700; 15% for taxable income between $51,700 and $452,400; 20% for taxable income over $452,400.
- Single: 0% for taxpayers earning taxable income up to $38,600; 15% for taxable income between $38,600 and $425,800; 20% for taxable income over $425,800.
- Married Filing Separately: 0% for taxpayers earning taxable income up to $38,600; 15% for taxable income between $38,600 and $239,500; 20% for taxable income over $239,500.
The New Standard Deduction Rates
One very important change under the new act is the substantially increased Standard Deduction for 2018. Under the new law, standard deductions have been increased to the following amounts:
- $24,000 for married couples whose filing status is Married Filing Jointly and surviving spouses who use the Qualifying Widow(er) filing status.
- $12,000 for taxpayers filing Single and married couples whose choose to use the Married Filing Separately filing status.
- $18,000 for taxpayers using the Head of Household filing status.
A taxpayer who can be claimed as a dependent is generally limited to a smaller standard deduction, regardless of whether the individual is actually claimed as a dependent. For 2018 returns, the standard deduction for a dependent is the greater of:
- $1,050; or
- The dependent’s earned income from work for the year plus $350 (but not more than the standard deduction amount attributable to that taxpayer).
Elderly and/or blind taxpayers receive an additional standard deduction amount added to the basic standard deduction. The additional standard deduction for a blind taxpayer (a taxpayer whose vision is less than 20/200) and for a taxpayer who is age 65 or older at the end of the year is:
- $1,300 for married individuals; and
- $1,600 for singles and heads of household.
These amounts would be doubled if a taxpayer is both blind and over 65.
Another significant change under the act is the reduction to zero of the personal exemption. In other words, beginning in tax year 2018, taxpayers can NO longer claim their dependents on their tax returns.
Child Tax Credit
Under the new act, the child tax credit has been increased from $1,000 to $2,000 for each qualifying child on a taxpayer’s tax return, who has a valid social security number. Note, however, that the credit may be reduced if: (a) the taxpayer’s modified adjusted gross income is more than $400,000 if married filing jointly, or (b), $200,000 if using any filing status other than married filing jointly.
In addition to increasing the amount of the child tax credit that may be applied, the new act also expanded the credit. Under this credit expansion, a taxpayer may be eligible for a partial Child Tax Credit of up to $500 with respect to:
- A dependent other than a child. That could be a dependent parent or sibling, or
- A qualifying child for whom a credit is disallowed solely because the taxpayer failed to include the child’s Social Security number on the tax return for the taxable year.
Adjustments to Income
The following expenses, which were formerly deductible as adjustments to income are no longer deductible under the new act:
- Moving Expenses (except for military relocations)—Consequently, any reimbursement received from an employer for such expenses must now be included in the employee’s taxable income.
- Alimony—Under the new act, alimony payments can no longer be deducted on the payer’s income tax return; neither is the recipient any longer required to report such amounts as income.
Itemized Deductions (Schedule A) Changes
Medical expenses—The new act reduced the applicable threshold for the deduction of unreimbursed medical and dental expenses to 7.5% of adjusted gross income (AGI) for the years 2017 and 2018. Formerly, only medical expenses that exceeded 10% of AGI were deductible. However, beginning in 2019, the rule reverts back to the original threshold; only medical and dental expenses that exceed 10% of AGI will be deductible—for all taxpayers regardless of age.
State and local taxes—Taxes paid by an itemizing taxpayer have generally been a deductible item on the taxpayer’s federal income tax return without limit. Beginning in 2018, the new act now limits the Schedule A tax deduction for state and local taxes to $10,000 ($5,000 for married taxpayers filing separately)
Mortgage interest—The new act made the following changes to the existing home mortgage interest deduction for taxable years 2018 through 2025:
- Interest paid on home equity loans and lines of credit incurred after December 15, 2017 is not tax-deductible unless the proceeds were used to buy, build or substantially improve the taxpayer’s home that secures the loan.
- Taxpayers can deduct Interest paid on home mortgages incurred after December 15, 2017, only on the amount on mortgages up to $750,000 ($375,000 or less if married filing separately). Taxpayers could formerly deduct interest paid on home acquisition indebtedness of up to $1,000,000 ($500,000 or less if married filing separately).
Miscellaneous deductions—Taxpayers could formerly deduct miscellaneous expenses such as unreimbursed employee expenses and tax preparation fees, to the extent that these expenses exceed 2% of AGI. Under the new tax act, these miscellaneous itemized deductions are suspended for expenses incurred after December 31, 2017 through 2025, and consequently cannot be deducted any more.
The tax treatment of personal casualty losses and thefts has been changed under the new act. These losses were formerly deductible up to a certain extent, but under the new act the itemized deduction for personal casualty and theft losses is now limited solely to losses attributable to federally-declared disasters.
Itemized Deductions Limitation
The new act has suspended the overall limitation that formerly existed on itemized deductions. For tax years beginning after December 31, 2017 through December 31, 2025, itemized deductions are no longer reduced for higher-income taxpayers.
Individual Mandate Penalty
Under the Affordable Care Act, taxpayers who were not covered by adequate health insurance during the year would generally be subject to a penalty. For the years after 2018, however, the new act has reduced the penalties for failing to maintain individual healthcare to zero percent. In other words, the legislation has effectively eliminated the individual mandate penalty beginning in 2019.