February 28, 2018

Tax Cuts and Jobs Act: Impact on Individuals Summary

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

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2017 Income tax season is in full swing. Let’s look at changes to income taxes brought to attention with new tax law. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut
package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.

Individual income tax rates:

The legislation replaces most of the seven current marginal income tax brackets (10%, 15%, 25%, 28%,33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts, and replaces existing “kiddie tax” provisions (under which a child’s unearned income is taxed at his or her parents’ tax rate) by effectively taxing a child’s unearned income using the estate and trust rates.

Standard deduction and personal exemptions:

The legislation roughly doubles existing standard deduction amounts, but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.

2018 Standard Deduction Amounts:

Filing Status Before Tax Cuts and Jobs Act After Tax Cuts and Jobs Act

Single or Married Filing Separately $6,500 $12,000

Head of Household $9,550 $18,000

Married Filing Jointly $13,000 $24,000

Itemized deductions

The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) is repealed, and the following changes are made to individual deductions:

  • State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
  • Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity indebtedness.
  • Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returnsto 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT)for the two years as well.
  • Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deducting certain cash gifts is increased from 50% to 60%.
  • Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.
  • Miscellaneous itemize 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Other noteworthy changes:

  • The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.
  • Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in following years.
  • In a permanent change that starts in 2018, Roth conversions cannot be reversed by recharacterizing the conversion as a traditional IRA contribution by the return due date.
  • For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse, and are not included in the income of the recipient. This is also a permanent change.

Disclaimer: Richard J. Schillig does not provide investment, tax, legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. We do not do taxes refer you your accountant for tax advice.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.

Filed Under: Finance