This past December saw the biggest tax law changes since those enacted under President Ronald Reagan in 1986. The following is a brief recap of the major tax law changes, the majority of which do not go into effect until next year for tax year 2018 and some not until 2019. However, now is the time to become familiar with this massive and groundbreaking act.
Individual Tax Tables and Rates
The Tax Cuts and Jobs Act (“TCJA’) modifies various individual tax law provisions. Here are some key changes:
Income Tax Rates and Exemptions
New Tax Rates and Brackets. For tax years 2018-2025, seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. See below for how the new law compares to current rates.
|Single||Married filing Joint||Single||Married filing Joint|
|10%||$0 – $9,325||$0 – $18,650||10%||$0 – $9,525||$0 – $19,050|
|15%||$9,326 – $37,950||$18,651 – $75,900||12%||$9,526 – $38,700||$19,051 – $77,400|
|25%||$37,951 – $91,900||$75,901 – $153,100||22%||$38,701 – $82,500||$77,401 – $165,000|
|28%||$91,901 – $191,650||$153,101 – $233,350||24%||$82,501- $157,500||$165,001 – $315,000|
|33%||$191,651 – $416,700||$233,351 – $416,700||32%||$157,501 – $200,000||$315,001 – $400,000|
|35%||$416,701 – $418,400||$416,701 – $470,700||35%||$200,001 – $500,000||$400,001- $600,000|
|40%||$418401 or more||$470,701 or more||37%||$500,001 or more||$600,001 or more|
|Head of Household||Married filing Separate||Head of Household||Married filing Separate|
|10%||$0 – $13,600||$0 – $9,525||10%||$0 – $13,600||$0 – $9,525|
|15%||$13,601 – $51,850||$9,526 – $38,700||12%||$9,526 – $51,800||$9,526 – $38,700|
|25%||$51,851 – $133,850||$38,701 – $78,075||22%||$38,701 – $82,500||$38,701 – $82,500|
|28%||$133,851- $216,700||$78,076 – $118,975||24%||$82,501- $157,500||$82,501- $157,500|
|33%||$216,701 – $424,950||$118,976 – $212,475||32%||$157,501 – $200,000||$157,501 – $200,000|
|35%||$424,951 – $453,350||$212,476 – $240,025||35%||$200,001 – $500,000||$200,001 – $300,000|
|40%||$453,351 or more||$240,026 or more||37%||$500,001 or more||$300,001 or more|
Kiddie Tax Modified. Under pre-TCJA law, pursuant to the “kiddie tax” provisions, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child. The remainder of the child’s taxable income (i.e., earned income, plus unearned income up to $2,100 (for 2018), less the child’s standard deduction) was taxed at the child’s rates.
For tax years 2018-2025, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates.
Personal Exemption Deduction Eliminated. Under pre-TCJA law, the deduction for each personal exemption was $4,150 for 2018. For tax years 2018-2025, the deduction for personal exemptions is eliminated.
Standard and Itemized Deductions
Standard Deduction Increased. Under pre-TCJA law, for 2018, the standard deduction amounts 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.
For tax years 2018-2025, 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 after 2018. No changes are made to the current-law which allows an additional standard deduction for the elderly and blind.
Medical Expense Deduction Threshold Temporarily Reduced. For tax years 2017-2018, the threshold for medical expense deductions is reduced from 10%-of-AGI (“Adjusted Gross Income”) to 7.5%-of-AGI for all taxpayers
State and Local Tax Deduction Limited. For tax years 2018-2025, a taxpayer’s itemized deduction for state and local taxes is limited to $10,000 ($5,000 for a married taxpayer filing a separate return) of the aggregate of (1) state and local property taxes and (2) state and local income. This is one of the biggest changes and will hurt New York, New Jersey and Connecticut taxpayers who have some of the highest state rates in the nation.
Warning: The provision also includes a rule stating that an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for tax years beginning after 2017.
Mortgage and Home Equity Indebtedness Interest Deduction Limited. Under pre-TCJA law, taxpayers could deduct as an itemized deduction qualified residence interest, which included interest paid on a mortgage secured by a principal residence or a second residence. The underlying mortgage loans could represent acquisition indebtedness of up to $1 million, plus home equity indebtedness of up to $100,000.
For tax years 2018-2025, the deduction for interest on home equity indebtedness is eliminated and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).
Note: The new lower limit doesn’t apply to any acquisition indebtedness incurred before 12/15/17.
Gambling Loss Limitation Modified. For tax years 2018-2025, the limitation on wagering losses under IRC Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.
Miscellaneous Itemized Deductions Eliminated. For tax years 2018-2025, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is eliminated.
“Pease” Limitation on Itemized Deductions Eliminated. Under pre-TCJA law, higher-income taxpayers who itemized their deductions were subject to a limitation on these deductions (commonly known as the “Pease limitation”). For tax years 2018-2025, the “Pease limitation” on itemized deductions is eliminated.
Income and Losses
New Deduction for Business Income from Pass-through Entities and Sole Proprietorships. For tax years 2018-2025, an individual generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified Real Estate Investment Trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. The 20% deduction is not allowed in computing AGI, but rather is allowed as a deduction reducing taxable income. This is a huge plus for the small business owner operating as a pass-through entity.
A limitation based on W-2 wages paid is phased in for married filing joint taxpayers with taxable income of
$315,000 or more ($157,500 for other individuals). A disallowance of the deduction with respect to specified service trades or businesses also is phased in above these threshold amounts of taxable income. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities
Treatment of Carried Interest. Under pre-TCJA law, carried interests were taxed in the hands of the taxpayer (i.e., the fund manager) at favorable capital gain rates instead of as ordinary income. For tax years beginning after 2017, the TCJA imposes a three-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain rather than ordinary income
Alimony Deduction by Payor and Income Inclusion by Payee Repealed. For any divorce or separation agreement executed after 2018 or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. This has caused a spike in divorces. In case you are in a position to file for divorce, and alimony is involved, now is the time to file. Please note though that our office deals only with the tax and bankruptcy aspect of law, and we do not handle divorces.
Moving Expense Deduction and Reimbursements Eliminated. For tax years 2018-2025, the deduction for moving expenses and the income exclusion for qualified moving expense reimbursements is eliminated except for members of the Armed Forces on active duty.
Alternative Minimum Tax (AMT)
AMT Retained with Increased Exemption Amounts. The TCJA retains the individual AMT but with increased exemption amounts and phase-out thresholds for years 2018-2025 (indexed for inflation) (AMTI).
The Exemption has been raised for married filing jointly or a qualifying widow(er) from $86,200 to $109,400 after the new law. For a single or head of household taxpayer it went from $55,400 to $70,300, while for married filing separate went from $43,100 to $54,700.
The TCJA changed the phase-out threshold for AMTI Exemption for a married filing joint or qualifying widow(er) from $164,100 to $1,000,000, whereas for a single or head of household jumped from $123,100 to $500,000, and for married filing separate from $82,050 to $500,000.
Other Significant Items
Child Tax Credit Increased. For tax years 2018-2025, the child tax credit is increased from $1,000 to
$2,000 per qualifying child under the age of 17 subject to certain income limitation and phaseouts.
Affordable Care Act Individual Mandate Repealed. Under pre-TCJA law, the Affordable Care Act required individuals, who were not covered by a health plan that provided at least minimum essential coverage, to pay a “shared responsibility payment” (also referred to as a penalty) with their federal tax return ($695 for 2018). Unless an exception applied, the tax was imposed for any month that an individual did not have minimum essential coverage.
For months beginning after 2018, the amount of the individual shared responsibility payment is permanently reduced to zero.
Estate and Gift Tax Retained with Increased Exemption Amount. Under pre-TCJA law, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this “basic exclusion amount” was $5.6 million ($11.2 million for a married couple).
For estates of decedents dying and gifts made after 2017 and before 2026, the TCJA doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).
General Business Tax Provisions
Many of the tax incentives businesses have grown accustomed to have been repealed, modified, or limited in some way. Here are the more relevant provisions.
Expensing and Depreciating Property
Immediate Expensing of Qualifying Business Assets. The TCJA establishes a 100% first-year deduction for qualified property acquired and placed in service after 9/27117 and before 1/1/23 (1/1/24 for certain property with longer production periods). This applies to new and used property. In later years, this first year deduction phases down as follows:
- 80% for property placed in service in
- 60% for property placed in service in
- 40% for property placed in service in
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Note: For qualifying property placed in service after 9/27/17, business owners can take advantage of this provision on their 2017 tax returns. Or, under a first-year transition rule, they can stick with current law and claim 50% bonus depreciation.
Increased Luxury Automobile Depreciation Limits. IRC Sec. 280F limits the annual amount of depreciation that can be claimed for passenger autos. For passenger autos placed in service after 12/31/17 for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is increased to $10,000 for the placed-in-service year, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. These amounts will be indexed for inflation for autos placed in service after 2018. For passenger autos eligible for bonus first-year depreciation, the increase to the first-year depreciation limit remains $8,000.
Shortened Recovery Period for Real Property. For property placed in service after 12/31/17, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. In other words, there is a shorter new recovery period which uses a different calculation to determine this value.
General Deductions, Exclusions, and Credits
Interest Expense. Regardless of its form, every business will be subject to a net interest expense disallowance. For tax years beginning after 12/31/17, net interest expense in excess of 30% of the company’s adjusted taxable income will be disallowed.
Like-kind Exchanges. The TCJA limits the like-kind exchange rules so they apply only to real property that is not held primarily for sale. However, under a special transition role, the like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before 12/31/17.
Deduction for Fringe Benefits. The TCJA makes the following adjustments to the fringe benefit rules (for amounts paid or incurred after 12/31/17):
- Disallows deductions for entertainment expenses
- Expands the current 50% limit on the deductibility of business meals to those provided in an in-house cafeteria or otherwise on the employer’s This will likely benefit larger companies that can afford
- Denies a deduction for employee transportation fringe benefits. However, the TCJA retains the exclusion from income for such benefits received by an In other words, those employees participating in Transitchek or other similar pre-tax programs, still can use these programs pre-tax.
- Eliminates a deduction for transportation expenses that are the equivalent of commuting for employees, except as provided for the safety of the employee.
New Credit for Employer-paid Family and Medical Leave. For tax years beginning after 12/31/17 and before 1/1/20, the TCJA allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. All qualifying full-time employees must be given at least two weeks of annual paid family and medical leave.
The 2018 Tax Cuts and Jobs Act is going to bring a lot of changes (both good and bad) to individual and business taxpayers. This letter only touches the surface of one of the biggest tax overhauls in the nation’s history. Future mailings will be sent, covering more of aspects of the new law as they become available.
We are still learning the over 1000 pages of the new tax law.
We are happy to share the main points and answer any questions you may have by calling at 212-387-7880 or 1-888-382-7880 or via email at email@example.com
Very truly yours,
Daniel M. Silvershein
Thomson Reuters Checkpoint National Tax Advisory, Issue:1006 (December 19, 2017)