In last month\u2019s newsletter we presented some general facets of the Tax Cuts and Jobs Act (TCJA). In this article, we will explore some portions of the new bill in greater detail.<\/p>\n
In general, the law cuts corporate tax rates permanently and individual tax rates temporarily. It permanently removes the individual mandate, a key provision of the Affordable Care Act, and it changes other policies in dramatic ways, such as the SALT deduction (which will be explained in more detail below).<\/p>\n
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It should be noted that the impact from the TCJA is not expected to occur until the 2018 (not 2017!) tax filing.<\/p>\n
How the Tax Cuts and Jobs Act impacts U.S. Tax Returns<\/span><\/p>\n The following items which are now presented with accompanying detail were deferred from discussion last month. Other items not presented yet should be presented in following months assuming they are of sufficient materiality and general interest.<\/p>\n A\u00a0report by Investopedia<\/a>\u00a0notes the following changes that will take place as a result of the new tax bill:<\/p>\n Income Tax Rates<\/strong><\/p>\n The law retains the current structure of seven individual income tax brackets, but in most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest\u00a0bracket remains at 10%, and the 35% bracket is also unchanged. The income bands\u00a0that the new rates apply to are lower, compared to 2018 brackets under current law, for the five highest brackets.<\/p>\n Standard Deduction<\/strong><\/p>\n The law raises the\u00a0standard deduction<\/a>\u00a0to $24,000 for\u00a0married couples filing jointly<\/a>\u00a0in 2018 (from $13,000 under current law), to $12,000 for\u00a0single filers<\/a>\u00a0(from $6,500), and to $18,000 for\u00a0heads of household<\/a>\u00a0(from $9,550). These changes expire after\u00a02025. The additional standard deduction, which the House bill would have repealed, will not be affected. Beginning in 2019, the inflation gauge used to index the standard deduction will change in a way that is likely to accelerate bracket creep (see below).<\/p>\n Personal Exemption<\/strong><\/p>\n The law\u00a0suspends the\u00a0personal exemption<\/a>, which is currently set at $4,150 in 2018, through 2025.<\/p>\n Inflation Gauge<\/strong><\/p>\n The law changes the\u00a0measure of\u00a0inflation<\/a>\u00a0used for\u00a0tax indexing<\/a>. The\u00a0Internal Revenue Service (IRS)<\/a>\u00a0currently uses the\u00a0consumer price index for all urban consumers (CPI-U)<\/a>, which will be replaced with\u00a0the\u00a0chain-weighted CPI-U<\/a>.\u00a0The latter takes account of changes consumers make to their spending habits in response to price shifts, so it is considered to be more rigorous than standard CPI. It also tends to rise more slowly than standard CPI, so substituting it will likely accelerate\u00a0bracket creep<\/a>. The value of the standard deduction and other inflation-linked elements of the tax code will also erode over time, gradually\u00a0pushing up tax burdens. The change is\u00a0not set to expire.<\/p>\n Family Credits and Deductions<\/strong><\/p>\n The law\u00a0temporarily\u00a0raises the\u00a0child tax credit<\/a>\u00a0to $2,000,\u00a0with the first\u00a0$1,400 refundable, and creates a non-refundable $500 credit for non-child dependents. The child credit can only be claimed if the taxpayer provides the child’s\u00a0Social Security number. (This\u00a0requirement does not apply to the $500 credit.) Qualifying children must be younger than 17. The child credit begins to phaseout when\u00a0adjusted gross income<\/a>\u00a0exceeds $400,000 (for married couples filing jointly, not indexed to inflation). Under current law, phaseout begins at\u00a0$110,000. These changes expire in 2025.<\/p>\n Head of Household<\/strong><\/p>\n Trump’s revised campaign plan, released in 2016, would have scrapped the head of household filing status, potentially raising taxes on 5.8 million\u00a0single-parent households, according to an\u00a0estimate<\/a>\u00a0by the Tax Policy Center (TPC). But the final version of the law that Congress passed and Trump signed leaves the head of household filing status in place.<\/p>\n Itemized Deductions<\/strong><\/p>\n Mortgage Interest Deduction<\/i><\/p>\n The law\u00a0limits the application of the\u00a0mortgage interest deduction<\/a>\u00a0for married couples filing jointly to\u00a0$750,000 worth of debt, down from $1,000,000 under current law, but up from $500,000 under the House bill.\u00a0Mortgages taken out before Dec. 15 are still subject to the current cap. The change expires after 2025.<\/p>\n State and Local Tax Deduction<\/i><\/p>\n The law caps the deduction for state and local taxes at $10,000 through 2025. The SALT\u00a0deduction disproportionately benefits high earners, who are more likely to\u00a0itemize<\/a>, and taxpayers in Democratic states. A number of Republican members of Congress representing high-tax states opposed\u00a0attempts to eliminate the deduction, as the Senate bill would have done.<\/p>\n Other Itemized\u00a0Deductions<\/i><\/p>\n The law\u00a0leaves the\u00a0charitable\u00a0contributions deduction<\/a>\u00a0intact, with minor alterations (if a donation is made in exchange for seats at college athletic events, it cannot be deducted, for example). The student loan interest deduction is\u00a0not affected (see “Student Loans and Tuition” below).\u00a0Medical expenses<\/a>\u00a0in excess of 7.5% of adjusted gross income are deductible for all taxpayers \u2013 not just those aged 65 or older \u2013\u00a0in 2017 and 2018; the threshold then reverts to 10%, as under\u00a0current law.<\/p>\n The law does,\u00a0however, suspend\u00a0a number of miscellaneous itemized deductions through 2025, including\u00a0the deductions for\u00a0moving expenses<\/a>, except for active duty military personnel; home office expenses; laboratory breakage fees; licensing and regulatory fees; union dues; professional society dues; business bad debts; work clothes that are not suitable for everyday use; and many others. The moving expenses deduction is\u00a0also suspended. Alimony payments will not longer be deductible after 2019; this\u00a0change is permanent.<\/p>\n Alternative Minimum Tax<\/strong><\/p>\n The law\u00a0temporarily raises the exemption amount and exemption phaseout threshold for the\u00a0alternative minimum tax (AMT)<\/a>, a device intended to curb\u00a0tax avoidance<\/a>\u00a0among high earners by making them estimate their liability twice and pay the higher amount.\u00a0For married couples filing jointly, the exemption rises to $109,400 and phaseout increases to $1,000,000; both amounts are\u00a0indexed to inflation. The provision expires after 2025.<\/p>\n Student Loans and Tuition<\/strong><\/p>\n The House bill would have repealed\u00a0the deduction for student loan interest expenses and the exclusion from gross income and wages of qualified tuition reductions. The law\u00a0leaves these breaks intact. The conference bill would\u00a0also have extended the use of\u00a0529 plans<\/a>\u00a0to K-12 private school tuition, but that provision was struck down by the Senate parliamentarian as ineligible to be passed through reconciliation.<\/p>\n