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Tax Cuts and Jobs Act Resource Center: Individuals

  • Mar 14, 2018
  • Marc S. Maser Christine A. Reuther
  • By Marc S. Maser  and Christine A. Reuther

Back to the Tax Cuts and Jobs Act Resource Center.

Individual Tax Rates

The Act has has seven tax brackets (10%, 12%, 22%, 24%, 32%, 35% and 37%) that apply to tax years beginning after December 31, 2017 and before January 1, 2026. The income threshold amounts for each rate bracket will be indexed for inflation. Indexing, unlike the rates, will not expire. Below are changes that will affect individuals filing taxes. Unless otherwise noted, changes under the Act apply to tax years beginning after December 31, 2017 and before January 1, 2026.[1]

Standard Deduction

  • The Act increases the standard deduction to:
    • $24,000 (joint return or a surviving spouse)
    • $18,000 (unmarried individual with at least one qualifying child)
    • $12,000 (for single filers)
  • The amount of the standard deduction will be indexed for inflation in tax years beginning after 2018.

Personal Exemption

  • A provision important for larger families has been “suspended” until 2026 to satisfy certain federal budget requirements applicable to the Act. Under prior law (and after the suspension period ends), taxpayers filing jointly could each claim a personal exemption plus one for each dependent. For the 2017 tax year, the exemption amount for each person is $4,050, indexed for inflation. The indexing will continue during the suspension period. The personal exemption is subject to phase out (e.g., for married taxpayers, the phase out is 2% for each $2500 by which their adjusted gross income (AGI) exceeded $261,500).

Alternate Minimum Tax (IRC Section 55)

  • The Alternate Minimum Tax (AMT) was conceived in 1969 as a way of making sure that the wealthiest individuals, defined at the time as those with AGI greater than $200,000, could not use deductions to eliminate all of their tax liability. Over the years, while the $200,000 threshold was tweaked a little, it was not indexed for inflation. In the intervening years, the threshold, previously meant to apply to “wealthy” taxpayers, caused the AMT to apply to a larger group of taxpayers, including many middle class families that reached the threshold because both spouses were working.
  • The Act continues a history of temporary patches to lessen the impact of the AMT but, given its revenue raising impact, it was not eliminated. For the period extending until December 31, 2025,
    • The AMT exemption amount is increased to:
      • $109,400 for married taxpayers filing jointly or for surviving spouses;
      • $70,300 for single taxpayers; and
      • $54,700 for married taxpayers filing separately. 
    • The AGI threshold for the application of the AMT is increased to $1 million for married taxpayers filing jointly or for surviving spouses and $500,000 for single taxpayers and married taxpayers filing separately.
    • During the patch period, the AGI threshold amounts are indexed for inflation. The benefit of indexing ends with increased threshold amounts.

Miscellaneous Itemized Deductions

The Act suspends or limits many of the miscellaneous itemized deductions and the associated limitations on the deductions that have long applied to individuals for the period extending until December 31, 2025. The benefit of the itemized deductions generally applied to higher income taxpayers or middle class families in states and cities with high local tax burdens. In addition, certain benefits were of particular assistance to the elderly and others facing catastrophic expenses from health problems or casualty losses. For many taxpayers who used to itemize, the increase in the personal exemption will offset the loss of the itemized deductions and simplify their tax returns. The deductions become available again and the limitations go back into effect in 2026, absent a permanent extension of the Act provisions. The suspended provisions were subject to time limits to conform to budgetary constraints applicable to the Act.

Certain other changes to itemized deductions were altered or eliminated permanently. For the most part these changes are not scored as having a substantial revenue impact.

Suspension of the 2 Percent Floor (IRC §62, §67(g), 262A)

  • Certain itemized deductions have long been subject to the “2 percent floor,” meaning that taxpayers could benefit from the “miscellaneous” itemized deductions only to the extent their aggregate amount of such deductions exceeded 2 percent of the their AGI. 
  • The Act “suspends” the ability to deduct all miscellaneous itemized deductions previously subject to the 2 percent floor. 
  • Affected deductions include:
    • Unreimbursed employee expenses
    • Tax preparation expenses
    • Investment expenses
    • Casualty and theft losses (unless related to a federally-declared disaster)
  • Teachers can continue to deduct up to $500 in unreimbursed expenses during the suspension period.

Itemized Deduction Limitation (IRC Section 68)

  • The Act “suspends” the limitation on itemized deductions through December 31, 2025. Previously, taxpayers were subject to a limit on itemized deductions that reduced the allowable deduction by 3 percent of the amount by which the taxpayer’s AGI exceeded an applicable threshold based on the taxpayer’s filing status. The reduction could not be greater than 80% of the itemized deduction and certain deductions were exempt from the limit.

Mortgage Interest Deduction (IRC Section 163)

  • The Act temporarily reduces the mortgage interest deduction from its prior maximum deductible amount of $1 million in acquisition indebtedness ($500,000 for married taxpayers filing separately) to a deductible interest amount of $750,000 ($375,000 for married taxpayers filing separately). 
  • “Aquisition indebtedness” is mortgage debt incurred in connection with the acquisition, construction or improvement of a principal or secondary residence.
  • This lower limit applies to loans incurred after December 15, 2017 and expires after December 31, 2025 for all loans, regardless of when the obligation was incurred.
  • The interest deduction on home equity indebtedness of not more than $100,000 ($50,000 for married taxpayers filing separately) is suspended through December 31, 2025.
  • The old limits continue to apply to taxpayers who refinance existing mortgage indebtedness that was incurred before December 16, 2017, provided that the refinanced amount does not exceed the amount of the mortgage indebtedness being paid-off.

State and Local Tax (SALT) Deduction (IRC Section 164)

  • Individual taxpayers were previously able to claim a deduction for state and local income and property or sales taxes. It was an important deduction to even middle class tax payers in high tax states. The state and local income tax deduction was not subject to limitation although it was subject to phase out under the itemized deduction limitation for certain high income taxpayers.
  • Now, for the years 2018 through 2025, individual taxpayers are subject to a hard limit on state and local tax deductions. All taxpayers, regardless of income, may elect to deduct state and local sales, income, or property taxes but only up to $10,000 ($5,000 for a married taxpayer filing a separate return).
  • Observation: In states like New Jersey or Pennsylvania, even modest homes can be subject to property taxes in excess of $10,000 because of school taxes. For those individuals who pay the Philadelphia Wage Tax or a local income tax on top of the applicable state income taxes, the impact of this change could be dramatic. The change will put pressure on local governments who are already challenged to find revenue. 

Charitable Contributions (IRC Section 170)

  • Charitable contributions are affected both directly and indirectly by the Act. 
  • The Act has a direct impact intended to increase deductions by permitting taxpayers to benefit from contributions of up to 60 percent of their AGI (an increase from 50 percent).
  • The Act repeals the ability to deduct up to 80 percent of the cost of contributions made to universities for “seating rights” at athletic events.
  • The Act also changes the substantiation requirements for certain deductions reported by the donee organization, which had limited utility and applied only to larger gifts. 
  • Note, these changes are permanent.
  • Observation: Charities have expressed concern, based on prior experience with changing tax rates, that the Act will depress charitable giving. The lower rate structure decreases the value of charitable contributions for tax-motivated donors. Coupled with the changes in the estate tax, there is less incentive for people who are able to give large sums to do so. 

Personal Casualty Losses (IRC Section 165(h))

  • Individual taxpayers may claim casualty loss deductions only for casualties incurred as a result of a federally declared disaster. If there is an uninsured loss due to an isolated fire, flood or storm during the effective period, a family will pay to rebuild its home with after tax dollars.
  • The change is permanent.

Wagering Losses (IRC Section 165(d))

  • The general rule is that gambling losses are limited to gains derived from gambling transactions. Under the Act, the scope of gambling losses is enlarged to include not only losses at the tables, but tolls, gas, parking and other expenses incurred in the conduct of the gambling activities.
  • This change is in effect for the tax years 2018 through 2025. 

Medical Expenses (IRC Section 213)

  • While earlier bills eliminated the medical deduction, the Act enhances it. Taxpayers can now deduct medical expenses above a floor equal to 7.5% of their AGI. Previously, only expenses in excess of 10% of AGI were deductible.
  • This threshold reduction is only applicable for 2017 and 2018.

Alimony Payments (IRC Section 215)

  • The Act eliminates the deduction for alimony and spousal support paid by the taxpayer. 
  • The Act also repeals the requirement that alimony be included in the income of the recipient. The stated intent of this provision is to conform the Code to a Supreme Court case decided in the early days of the Internal Revenue Code that held that alimony and spousal support do not constitute income. 
  • The rules for child support are not changed.
  • The new rule is effective for divorce decrees, separation agreements and certain modifications of those agreements entered into after December 31, 2018. 
  • Note, this provision is not a suspension of prior law. It is a permanent change.

Moving Expenses (IRC Sections 132(g) and 217)

  • The Act suspends the deduction available for new job moving expenses when the new workplace is more than 50 miles further from the taxpayer’s residence than the old job. 
  • Employee reimbursements for moving expenses are also treated as taxable income during the same period.
  • Certain active duty military personnel can still claim the deduction.
  • The suspension is applicable for the tax years 2018 through 2025.
  • Observation: Companies will find it more expensive to relocate employees if they have to gross them up for the taxes due on the moving expenses.

INDIVIDUAL TAX CREDITS

Child Care Tax Credit (IRC Section 24)

  • The previous $1000 childcare credit for each qualifying child under the age of 17 was subject to a phase out for individuals, starting at an AGI of $75,000 and for married individuals at $110,000.
  • The Act temporarily increases the child tax credit to $2,000 per qualifying child. A maximum of $1400 (indexed for inflation) is refundable.
  • The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The provision generally retains the present-law definition of dependent. The phase out limits are increased to $400,000 for married taxpayers and $200,000 for all other filers (not indexed for inflation).
  • These modifications apply for tax years 2018 through 2025.

College Savings and Student Loans (IRC Sections 529 and 108)

  • For tax years starting in 2018, taxpayers can use up to $10,000 a year from a qualified tuition savings account to pay for elementary and secondary school expenses.
  • For the period extending from January 1, 2018 through December 31, 2025, student loans that are discharged due to the death or disability of the student will not result in taxable discharge of indebtedness income.
  • The interest on student loans remains deductible, contrary to what was proposed in the House bill.
  • The Act does not alter the tax treatment of graduate student tuition waivers.

 


[1] New Rate Brackets:

  • Married Filing Jointly and Surviving Spouses:
    • 10% (Taxable income not over $19,050) 12% (Over $19,050 but not over $77,400)
    • 22% (Over $77,400 but not over $165,000)
    • 24% (Over $165,000 but not over $315,000)
    • 32% (Over $315,000 but not over $400,000)
    • 35% (Over $400,000 but not over 600,000)
    • 37% (over $600,000)
  • Married Filing Separately:

    • 10% (Taxable income not over $9,525)
    • 12% (Over $9,525 but not over $38,700)
    • 22% (Over $38,700 but not over $82,500)
    • 24% (Over $82,500 but not over $157,500)
    • 32% (Over $157,500 but not over $200,000)
    • 35% (Over $200,000 but not over $300,000)
    • 37% (Over $300,000)
  • Head of Household:

    • 10% (Taxable income not over $13,600)
    • 12% (Over $13,600 but not over $51,800)
    • 22% (Over $51,800 but not over $82,500)
    • 24% (Over $82,500 but not over $157,500)
    • 32% (Over $157,500 but not over $200,000)
    • 35% (Over $200,000 but not over $500,000)
    • 37% (Over $500,000)
  • Single Individuals:

    • 10% (Taxable income not over $9,525)
    • 12% (Over $9,525 but not over $38,700)
    • 22% (Over $38,700 but not over $82,500)
    • 24% (Over $82,500 but not over $157,500)
    • 32% (Over $157,500 but not over $200,000)
    • 35% (Over $200,000 but not over $500,000)
    • 37% (Over $500,000)

Back to the Tax Cuts and Jobs Act Resource Center.

DISCLAIMER: Although McCausland Keen + Buckman always strives to provide accurate and current information, the foregoing is intended for general informational purposes only, shall not be construed as legal advice, and does not create or constitute an attorney-client relationship.

Marc S. Maser

about the author

Marc S. Maser

Marc helps clients buy and sell companies, and structure and finance tax-efficient domestic and foreign business transactions.

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Christine A. Reuther

about the author

Christine A. Reuther

Christine helps clients structure new business ventures, acquisitions and divestitures and provides ongoing contracting and tax advice.

Read Attorney Profile More Articles by Christine Contact Christine

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