2017 Tax Cuts and Jobs Act – How It Affects You in 2018 and Beyond

You have probably heard about the new tax act. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017. Although a number of the recent tax acts were made retroactive to the beginning of the tax year, the new act is different. Almost all of the provisions took effect on January 1, 2018. The main reason that it most likely was not retroactive to January 1, 2017 was because it contains the most sweeping changes in the tax law since the Tax Reform Act of 1986. If it was made retroactive to January 1, 2017, the Internal Revenue Service would have needed to interpret the new law and change all forms, instructions and publications in time for the 2018 filing season which started only ten days later. Not happening.

The new act was business focused and overall was helpful to most businesses. In the new act, there were three major tax policy shifts, all related to business: 1) reduce corporate tax rates, 2) shift from worldwide business taxation to a territorial system, and 3) shift from depreciation to capital asset expensing. Although there were numerous other changes, many affecting individuals, those changes were secondary to the tax policy changes. The individual changes increased income taxes for some taxpayers and decreased taxes for others. These changes included, among many other things, revised tax rates on ordinary and capital gain income, elimination of personal and dependency exemptions, increasing the standard deduction and the elimination or new limitations on certain itemized deductions. Here’s a look at some of the key individual provisions of the new law that may affect you.

Tax rates. The new act keeps the existing seven individual tax brackets, but rearranges them and reduces the rates in most of them. The initial bracket is still 10%, but the top bracket has been reduced 2.6% to 37%. For tax years beginning after 2017, the new brackets are 10%, 12%, 25%, 22%, 32%, 35% and 37%. If you are in the lower income tax brackets or the highest tax bracket, you will see a tax rate reduction. However, if you are a single taxpayer with taxable income between $157,000 and $200,000, you will now be paying 32% vs. 27% in 2017. And you now hit the 35% tax bracket at $200,000 if you are single and  $400,000 married filing joint, vs. $416,000 for both in 2017. These bracket dollar amounts will now be permanently inflation-adjusted using a chained consumers’ price index. All of these changes only continue through 2025. In 2026, everything goes back to the way it was in 2017, unless of course, the folks in Washington change it.

Capital gains and qualified dividends rates. The new law retains the 0%, 15% and 20% preferential tax rates on long-term capital gains and qualified dividends. The brackets are modified. The 15% bracket now starts at $38,600 if you are single or $77,200 if you are married filing joint. And the 20% bracket now starts at $425,800 if you are single or $479,000 if you are married filing joint.

Standard deduction increased. The standard deduction nearly doubles in 2018 to $12,000 single, $24,000 married filing joint and $18,000 head of household. If you itemized deductions in 2017, because of this increased standard deduction and itemized deduction limitations, you may not be able to itemize deductions in 2018. The additional standard deductions for the elderly and the blind are not changed and remain at $1,600 if you are single and $1,300 if you are married.

Personal exemptions suspended. The personal and dependency exemptions are not repealed. They are suspended for seven years from 2018 to 2025.During that seven year period, you cannot claim exemptions for yourself, your spouse or any of your dependents. Although, the standard deduction is nearly doubled and tax rates decreased, if you claim more than one personal exemption, you are probably penalized tax-wise after 2017. The inflation adjusted personal and dependency exemption, which was $4,050 in 2017, returns in 2026.

Child & dependent credit increased. The child tax credit has been doubled in 2018 to $2,000 per qualifying child. And now it is refundable, to a maximum of $1,400. And you may be able to take the credit in 2018 if you had too much income to take the credit in 2017. There was a massive increase in the income levels for the child credit phase out. In 2018, the child credit begins to disappear for single filers at $200,000 adjusted gross income vs. $75,000 in 2017 and $400,000 for married couples vs. $110,000 in 2017. And there is now a new $500 credit for non-child dependents.

Medical expenses threshold temporarily reinstated. The act temporarily reinstates the 7.5% adjusted gross income threshold of the medical expense deduction for all taxpayers in 2017 and 2018, not just seniors.

State and local taxes limited. Under the new act, the deduction for state and local taxes in excess of $10,000 is suspended from 2018 to 2025. So if your state and local income, sales, use and real estate taxes are more than $10,000 in a year, you cannot deduct the excess over $10,000.

Mortgage interest limited. From 2018 to 2025, your mortgage interest may be limited. Mortgage interest is now deductible only on a principal amount up to $750,000, down from $1 million in 2017. The act grandfathers acquisition debt incurred or agreed to prior to December 15, 2017 and closed before April 1, 2018. Refinanced debt interest is only deductible to the extent it does not exceed the amount which is refinanced. The deduction for interest on all second mortgages, home equity loans and lines of credit are suspended from 2018 to 2025, with no grandfathering, unless the proceeds were used to acquire, construct or substantially improve the home, and only to the extent total mortgage indebtedness is within the $750,000 principal limit.

Miscellaneous itemized deductions suspended. From 2018 to 2025, all miscellaneous itemized deductions that were subject to the 2% adjusted gross income limitation are suspended. You can longer deduct employee business expenses, investment expenses, tax preparation and advice fees or union and professional dues.

Itemized deduction limitation suspended. The phase-out of itemized deductions for higher income taxpayers has been suspended under the new act until 2025.

Alimony deduction eliminated. If your divorce decree is entered or modified after December 31, 2018 and are paying alimony, you can no longer deduct the alimony and have your ex-spouse include it in his or her income. So if you are paying or going to pay alimony and want to deduct the alimony, meet the IRS alimony rules and have your divorce decree entered or modified before the end of the year.

Alternative Minimum Tax relief. The new law provides permanent alternative minimum tax (AMT) relief. Your AMT exemption went from $50,500 in 2017 to $70,300 in 2018 if you are single, and from $78,750 to $109,400 if you are married. In addition, for tax years beginning after 2017, the point at which your AMT exemption starts to disappear also has increased to $500,000 if you are single and $1 million if you are married.

To find out how this will affect you, run the numbers. Do a calculation or have your tax preparer do a calculation using the 2018 rules with your 2017 income and deductions and compare your tax liability. The new tax act may have helped you, or it may not have.

By Matthew M. Wallace, CPA, JD

Published edited June 10, 2018 in The Times Herald newspaper Port Huron, Michigan as: How the new tax bill affects you

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