Congress Passes Federal Tax Legislation: Individual Provisions

December 22, 2017

On December 20, Congress passed the Tax Cuts and Jobs Act, and President Trump signed it into law on December 22. The bill represents the most significant Federal tax law changes since The Tax Reform Act of 1986.

The final bill that came out of a joint Conference Committee represents a compromise of provisions proposed by the House and Senate, and it changes many long-standing and significant rules governing individual and business taxes. In addition, North Carolina and many other states have built their tax laws on the Internal Revenue Code. With such major changes to the Federal law, many states will be taking a close look at the implications on their budgets, and we can expect to see some adjustments to state tax laws as a result.

The IRS is responsible for issuing Regulations to clarify and expound on tax legislation after it is enacted. While we expect significant Regulations will be necessary, it could take many months and even years for them to be completed.

Following are highlights of some of the more significant provisions of the Tax Cuts and Jobs Act. Unless otherwise noted, the effective date for all provisions is January 1, 2018.

A summary of business tax provisions is available at https://www.jpspa.com/congress-passes-federal-tax-reform-legislation-business-provisions/.

Individual Tax Provisions
Most of the following individual tax provisions are set to expire on December 31, 2025.

Income tax rates
Currently, there are seven individual income tax rates ranging from 10% to 39.6%. Under the new law, there will continue to be seven rates, ranging from 10% to 37%. The thresholds at which each rate applies will change, as follows:

2017 law New law
Income Range Rate Income Range Rate
Up to $18,650 10% Up to $19,050 10%
$18,650 – $75,900 15% $19,050 – $77,400 12%
$75,900 – $153,100 25% $77,400 – $165,000 22%
$153,100 – $233,350 28% $165,000 – $315,000 24%
$233,350 – $416,700 33% $315,000 – $400,000 32%
$416,700 – $470,700 35% $400,000 – $600,000 35%
Over $470,700 39.60% Over $600,000 37%

The current long-term capital gains rates (0%, 15% and 20%) remain in effect under the new law.

Alternative minimum tax (AMT)
While both the House and Senate proposals repealed the AMT, the final law continues this tax that was first enacted in 1970. The exemption that reduces the impact of the AMT will increase by about 40%, which should result in fewer people paying the tax. In addition, the exemption is phased out for higher income individuals, and that phase-out threshold is increased significantly under the new law; this means that the exemption should be helpful for many additional taxpayers.

ACA mandate
The final bill includes the Senate’s proposal to eliminate the penalty applicable to individuals that do not have minimum essential healthcare insurance coverage. Effective in 2019, the penalty will be adjusted to zero.

Deductions
Taxpayers are given a standard deduction to reduce the amount of their income subject to tax. The new bill nearly doubles that deduction, as follows:

Filing status 2017 law New law
Single  $       6,350  $     12,000
Married – separate  $       6,350  $     12,000
Head of household  $       9,350  $     18,000
Married – joint  $     12,700  $     24,000

If a taxpayer can accumulate certain deductions that exceed the standard deduction, those deductions can be itemized, and the higher deduction claimed. The bill made several adjustments to deductions that can be itemized, including:

  ⦁ Taxes – a maximum of $10,000 ($5,000 for married taxpayers filing separately, “MFS”) can be claimed for the combined total of real property taxes, personal property taxes, state and local income taxes, foreign income taxes and sales tax. Currently, there is no dollar limit placed on these deductions.
⦁ Mortgage interest – only the interest attributed to $750,000 ($375,000 for MFS) of home mortgage debt will be deductible. This applies to debt incurred on or after December 15, 2017. For debt incurred before December 15, the current limit of $1 million ($500,000 for MFS) will apply. For mortgages that are refinanced, the date of the original mortgage will be considered to determine which limitation applies.
⦁ Home equity interest – interest on home equity debt will be eliminated. Currently, interest on up to $100,000 of debt can be claimed.
⦁ Miscellaneous itemized deductions – deductions such as tax preparation fees, investment expenses, and unreimbursed employee expenses will be eliminated. Currently, the sum of these that exceeds 2% of gross income can be deducted.
⦁ Medical expenses – these deductions will still be allowed. Currently, deductions that exceed 10% of gross income can be claimed. The new law lowers that threshold to 7.5%, effective for 2017 and 2018.
⦁ Charitable deductions – these will still be allowed under the new law, with a few changes introduced. One such change will increase the annual limitation for cash donations from 50% of income to 60% of income.
⦁ Total itemized deduction limitation – the reduction of total itemized deductions for taxpayers with higher income levels will be eliminated. Currently, this so-called “Pease limitation” reduces the amount of benefit derived from certain itemized deductions.

Personal exemptions
Currently, each taxpayer is granted an exemption of $4,050, which serves to lower total income that is subject to tax. The new law repeals all personal exemptions.

Child and dependent tax credits
The new law increases the per child tax credit from $1,000 to $2,000, and the refundable portion (the portion that can exceed a taxpayer’s tax obligation and be paid to them) will be increased from $1,000 to $1,400. In addition, the gross income levels at which the credit begins to be phased out will increase significantly (for married filing joint taxpayers, the current threshold is $110,000; the new threshold will be $400,000). This should result in many additional taxpayers receiving the credit, and the amount of the credit being higher.

The new law also introduced a new credit of $500 per non-child dependent. The credit is designed for dependents that are not qualifying children (e.g. aging parents).

Estate tax
Currently, the first $5.49 million in assets is excluded from an individual’s estate, with any excess being taxable. This is commonly referred to as the lifetime exclusion. The new law more than doubles the exclusion amount to $11.2 million. Note that currently the estate tax only affects .2% of taxpayers, so even fewer taxpayers will be impacted once the higher exclusion becomes effective.

Alimony
Currently, alimony payments are deductible, and alimony received is taxable income. The new law eliminates the deduction and the income reporting for divorce or separation agreements executed after December 31, 2018. Some specific date rules apply for agreements existing at or before that date but modified thereafter.

Other provisions
The new law includes several other provisions not addressed in this article, including recharacterization of Roth IRAs, treatment of moving expenses, and broadening of eligible expenses paid by a Section 529 (“college savings”) plan.

Summary
There are many other provisions of this new legislation that are not included in this article. Also, as there are many complexities in the legislation and the IRS has not yet issued Regulations to clarify some matters, it is important to ensure full understanding of the rules and implications before action is taken. JPS is available to help you understand and consider action items to take in light of your specific situation and facts.

Please continue to watch for more information from JPS about this tax legislation in the coming weeks.

JPS is available to help you understand and consider action items
to take in light of your specific situation and facts.  Contact us.

www.jpspa.com

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