On December 22, 2017, the President signed into law a new tax bill that has dramatic effects on the current tax system. Here are highlights affecting most individuals:
- Increase in the standard deduction to $12,000 for individuals filing single and $24,000 for married couples filing jointly. This is an increase from the 2017 standard deductions of $6,350 and $12,700.
- Personal exemptions are no longer allowed. In 2017 the personal exemption amount was $4,050 per individual.
- Maximum amount allowed as deduction for local property taxes and state and local income taxes (SALT) is $10,000. Previously there was no limitation on the amount of these deductions unless the Alternative Minimum Tax (AMT) applied.
- A new 20% deduction for qualified business income, meaning that 20% of the income from entities such as partnerships, LLCs, or S corporations can be deducted. The deduction is limited for certain service businesses (such as law, accounting, and medicine) if income exceeds certain thresholds of $315,000 for married filing separate and $157,500 for single. The deduction applies to income from certain Real Estate Investment Trust (REIT) dividends, cooperative dividends, and certain publicly traded partnership income.
- Home equity interest, such as with a Home Equity Line of Credit (HELOC), is no longer deductible. However, mortgage interest remains deductible on the first $750,000 for mortgages taken out after December 14, 2017. Previously the cap was $1,000,000.
- The overall limitation on itemized deductions is repealed (this was known as the Pease Amendment). Previously, certain itemized deductions were reduced when a taxpayer’s income exceeded a threshold. In 2017 this threshold was $261,500 for single and $313,800 for married filing jointly. Itemized deductions were reduced by 3% of the amount of Adjusted Gross Income (AGI) in excess of these thresholds.
- The bill repeals the deduction for personal casualty and theft unless in a declared disaster zone. Previously a taxpayer was allowed to take an itemized deduction if they suffered a loss, such as a home fire, and they had no insurance to cover the damages, or the damages exceeded the insurance coverage.
- Increase percentage limitation for deductibility of cash gifts to public charities to 60%. Previously, the limitation was 50%.
- Miscellaneous itemized deductions subject to the 2% floor are no longer allowed. Included in these deductions were tax preparation fees, certain legal fees, investment management fees, unreimbursed employee business expenses, and union dues.
- The threshold for deducting unreimbursed medical expenses has been reduced from 10% to 7.5%, effective for tax years beginning after December 31, 2016.
- Exclusion for employer-provided moving expenses is no longer allowed. Previously a taxpayer was allowed to exclude from income certain moving costs if paid by the taxpayer’s employer.
- Child tax credit increases to $2,000 per qualifying child. Previously the amount of credit was limited to $1,000 per child. The income thresholds at which the credit begins to be phased out has increased from $75,000 for single and $110,000 for married filing jointly, to $200,000 and $400,000, respectively.
- Distributions from 529 plans can now be made to pay for elementary and secondary education (not to exceed $10,000 per student per year) and the definition of higher education expenses has been expanded to include public, private, or religious elementary school and high school.
- Alimony payments are no longer deductible by the payor, or includible in income of the recipient. This change applies for divorce or separation agreements executed after December 31, 2018. Prior agreements are allowed to adopt this treatment only if parties agree.
- AMT remains but applies at a higher threshold than previously. The 2017 phase-out threshold was $120,700 and $160,900, respectively.
- Eliminates the individual mandate for Obamacare, which was essentially the penalty for failure to maintain a health plan.
- Increases the exemption amount for estate, gift, and generation skipping taxes. The exemption amount for 2018 was scheduled to increase to $5,600,000, but will now increase to $11,200,000, effectively doubling all of the exemption amounts.
Stay tuned for further posts on the new tax law.