Overview of the Individual Provisions in the New Tax Reform Act

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For the first time in 30 years, we have sweeping changes in income tax law! On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act of 2017” (“TCJA”). Unlike tax acts of recent years, TCJA will require significant additional guidance through legislation, Treasury Regulations and other agency interpretations. However, given that TCJA will affect nearly every taxpayer, I have summarized selected provisions that are expected to impact most individual taxpayers. Generally, the individual provisions are effective for years beginning after 2017 and sunset after 2025. Certain exceptions are identified below, and others are sprinkled throughout the text of the TCJA. However, an important takeaway is that individual tax reform is not permanent. (Note: We have a similar blog on the business-related impacts. Click here to read more.)

Tax Rate Changes:

In general, the tax rates have been lowered through a combination of expanded brackets and decreased marginal rates. A comparison of the rate tables for married filing joint taxpayers is illustrated below:

While these decreased rates may excite you initially, hold your applause until the end, as the computation of taxable income may actually cause your effective tax rate to increase.

The New Standard Deduction:

The standard deduction has been nearly doubled under TCJA. The chart below depicts a comparison under the old and new regimes:

Given the limitations on certain itemized deductions discussed below, many more individuals may take advantage of the increased standard deduction.

Personal Exemptions:

Personal exemptions are no more. TCJA has repealed the personal exemption and, in effect, lumps the exemption in with the increased standard deduction. While the income phase-outs of old eliminated the benefits of the personal exemptions for many taxpayers, those with modest income will see this repeal as negative.

Child Tax Credits:

The child tax credit has been doubled under the new regime to $2,000 per child. Additionally, the phase-out of this credit has been significantly increased. Under TCJA, the phase out begins at $200,000 for single filers and $400,000 for joint filers. The refundable portion of the credit has increased from $1,000 to $1,400 for certain taxpayers.

Related to the child tax credit is a whole new credit for dependents who are not a Qualifying Child. Under this provision, a $500 credit is available for each such dependent. The same phase-out levels apply.

Alternative Minimum Tax (AMT):

The one thing all of America could agree on was that tax reform should include the elimination of the dreaded AMT. So what did Congress do with AMT in the TCJA? They kept the onerous calculation!! Before you get too upset and stop reading this to pen a note to your Congressional representatives, here is the rest of the story. AMT is still here; however, its reach should be greatly reduced. The AMT exemption has increased to $70,300 for single filers, $109,400 for joint filers, and $54,700 for married individuals filing separately. Additionally, the phase-out of the exemption has also been increased to $1 million for joint filers and $500,000 for all others.

This was not the win for which taxpayers were looking, but is much better than what we have previously experienced. Though not perfect, this should be a positive for many people.

Tax Treatment of Alimony:

Effective for divorce or separation instruments executed after 2018, payments of alimony will no longer be deductible for the payer, and such payments will no longer be taxable income for the recipient. For instruments executed before 2019, the historical treatment will continue to apply (deduction for payer and income to recipient). For agreements originally enacted before 2019, but modified after 2018, the historical treatment will continue to apply, unless the instrument or modification specifically provides the payments are to be nondeductible.

Changes to the Itemized Deductions:

State and Local Taxes
Receiving the most publicity has been the modification of the state and local tax deduction. The TCJA limits the deduction to $10,000 per year. The limit is applied to the aggregate total of real estate taxes, state and local income taxes and personal property taxes. This will represent a significant limit to many taxpayers, especially those in high tax jurisdictions and homeowners.

Home Mortgage Interest
The deduction remains, so don’t panic. However, there is a new limit on acquisition indebtedness. Previously, interest deductibility was limited for indebtedness greater than $1,000,000. Under the TCJA, the limit is decreased to $750,000. This limitation applies to mortgages closed after December 15, 2017. For mortgages closed on or before this date, the interest is deductible under the old rules. Refinancings closed after December 15, 2017 on mortgages in effect prior to that date are grandfathered in, to the extent that the principal balance does not exceed the amount outstanding on the original debt at the time of refinancing.

Home equity indebtedness did not fare as well. Previously, taxpayers could deduct interest on qualifying home equity indebtedness to the extent the principal did not exceed $100,000. For tax years beginning after 2017, this deduction is eliminated. Unlike acquisition indebtedness, these instruments do not receive grandfathering treatment.

Miscellaneous Itemized Deductions
Those deductions classified as miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation are gone. This includes: unreimbursed employee expenses, tax preparation fees, investment advisory fees, and others. While many taxpayers were unable to overcome the 2 percent hurdle, those in sales positions or with significant investment management fees may see a significant reduction in their itemized deductions.

The Pease Limitation
The Pease limitation was affectionately named for Rep. Donald Pease of Ohio, and it represented the 3 percent phase-out of itemized deductions when a taxpayer’s AGI exceeded certain thresholds. This limitation has been eliminated.

The Shared Responsibility Tax:

For tax years after 2018, the tax imposed for failing to carry adequate health care coverage has been reduced to zero, so essentially eliminated. Ignoring the debated impact on the health insurance markets, this will represent a decrease in the tax liability for individuals without the mandated coverage.

Weighing in at just over 400 pages, the above summary only touches the surface of the changes imposed under the TCJA. Further, the practical implementation awaits additional legislative and agency guidance. Our firm is continually monitoring these developments and will issue additional commentaries as we receive and digest those materials. In the meantime, please feel free to reach out to our professionals should you have specific questions on these provisions or others you believe may have an impact on your individual situation.