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Michel Caouette, CPA

Congress Passes Final Tax Cuts and Jobs Act: What it Means for Individuals

2017-12-20

UPDATED DECEMBER 20, 2017

Tax Rates

Tax rate changes under the final version of the bill are temporary and set to expire after 2025. The tax rates and related income brackets are as follows:

Rate Individual Return
Income Ranges
Joint Return
Income Ranges
10% $0 - $9,525 $0 - $19,050
12% $9,525 - $38,700 $19,050 - $77,400
22% $38,700 - $82,500 $77,400 - $165,000
24% $82,500 - $157,500 $165,000 - $315,000
32% $157,500 - $200,000 $315,000 - $400,000
35% $200,000 - $500,000 $400,000 - $600,000
38.5% Over $500,000 Over $600,000

The final bill retains the current tax treatment of qualified dividends and capital gains and also retains the net investment income tax, additional Medicare tax and the medical device excise tax.

Personal exemptions under current law are $4,050 per dependent. Under the final bill these exemptions are repealed.

Deductions and Credits

The standard deduction is significantly increased under the final bill. Effective in 2018, married taxpayers filing jointly will be able to claim a deduction of $24,000 while single taxpayers and individuals filing as head of household may claim deductions of $12,000 and $18,000, respectively. The increase to the standard deduction hopes to achieve President Trump’s goal of simplifying tax filing by increasing the number of taxpayers who claim the standard deduction.

In addition to an increase in the standard deduction, many taxpayers will no longer be able to itemize their deductions as many deductions are set to disappear or have additional limitations under the final bill. Of the more significant itemized deductions set to change is the deduction for state and local income taxes. The final bill limits the annual deduction for state and local income taxes and property taxes to $10,000. The final bill provides an exception for state and local income taxes attributable to business income.

One tax planning tip that has been widely suggested in light of the anticipated changes to the itemized deduction of state, local, and property taxes has been to prepay these taxes in 2017. But the final version of the bill includes a provision that prevents 2017 deductions of state and local taxes imposed for tax years beginning in 2018. Taxpayers should still consider the potential benefit of prepaying 2018 property taxes in 2017.

The home mortgage interest deduction will be limited to interest on mortgage indebtedness up to $750,000 for new mortgage indebtedness incurred after December 15, 2017 and before January 1, 2026. The provisions of the final bill allow taxpayers to include mortgage interest on second homes with lower dollar caps. No interest deduction will be allowed for interest on home equity indebtedness.

Miscellaneous itemized deductions subject to the 2% floor under current provisions will no longer be deductible under the final bill. However, the bill retains the deduction for qualified unreimbursed medical expenses and temporarily lowers the threshold for deducting such expenses from amounts exceeding 10% of adjusted gross income (AGI) to amounts exceeding 7.5% of AGI for tax years 2017 and 2018.

For students, the final bill retains both the student loan interest deduction and = the American Opportunity Tax Credit.

Alimony payments required by divorce or separation agreements executed after December 31, 2018 will no longer be deductible and the inclusion of such payments as taxable income to the recipient is repealed under the provisions of the final bill.

The final bill provides a temporary increase to the child tax credit to $2,000 per qualifying child and allows $1,400 of that credit to be refundable. The phase out limits are increased to $400,000 for joint filers and $200,000 for all others. The bill also provides a $500 nonrefundable credit for non-child dependents.

Alternative Minimum Tax

The final bill retains the Alternative Minimum Tax (AMT) for individuals but increases the exemption amount through 2025 to $109,400 for married taxpayers filing a joint tax return ($70,300 for single and head-of-household filers). The exemption phase-out levels are also increased so that AMT will apply to income levels of $1 million for married taxpayers filing a joint return ($500,000 for others).

Retirement

The final bill keeps many of the current rules for 401(k) and other retirement plans. However, the final bill repeals the rule allowing certain IRA conversions and modifies certain hardship distribution rules.

Federal Estate Tax

The final bill doubles the federal estate and gift tax exclusion resulting in a $22 million exemption for married couples in 2018.

What’s next?

President Trump has indicated his support of the final bill and it is expected that he will sign it into law before the end of the calendar year. Some provisions mentioned above have immediate effective dates and will impact taxpayers in 2017, while most are effective for tax years beginning in 2018. Signing the bill into law prior to December 31, 2017 also has the potential to materially impact U.S. GAAP based financial statements of corporations who recognize deferred tax assets and/or liabilities on their balance sheets.

Implementing the many complexities of tax reform is expected to take several weeks and months. If you are unsure what your next steps should be, please contact your BerryDunn tax advisor.