Taxes

December 20, 2017 / John J. Furey

New 2018 Tax Rules for Individual Taxpayers

A client asked me “What are the new tax rules for 2018 and what should I do in 2017 to reduce my taxes?”

Both Houses of Congress have passed the Tax Cuts and Jobs Act (Tax Act). The President will likely sign it in the next few days. Here is a summary of some of the significant provisions affecting individual taxpayers and possible actions to consider taking no later than December 31, 2017. Most provisions of the Tax Act are effective January 1, 2018. Items denoted with an asterisk * are scheduled to expire after 2025. These provisions will revert back to the rules in effect in 2017, unless a future Congress acts.

Income Tax Brackets based on Taxable Income*

Tax Rate Single Married Head of Household
10% 0 to $9,525 0 to $19,050 0 to $13,600
12% $9,526 to 38,700 $19,051 to 77,400 $13,601 to 51,800
22% $38,701 to 70,000 $77,401 to 165,000 $51,801 to 82,500
24% $70,001 to 160,000 $165,001 to 315,000 $82,501 to 157,500
32% $160,001 to 200,000 $315,001 to 400,000 $157,501 to 200,00
35% $200,001 to 500,000 $400,001 to 600,000 $200,001 to 500,000
37% Over $500,000 Over $600,00 Over $500,000

 
The Alternative Minimum Tax (AMT) is retained. It is expected to affect taxpayers with incomes over $500,000 (single) and $1,000,000 (married). *

 

Standard Deduction and Personal Exemptions*

  • Standard Deduction increases from $6,500 to $12,000 (single); from $13,000 to $24,000 (married); and from $9,550 to $18,000 (head of household).
  • Personal Exemptions go from $4,150 per taxpayer to zero.

Family Tax Credits*

  • Child tax credit for children under the age of 17 increases from $1,000 to $2,000 with up to $1,400 refundable even if the taxpayer owes no income tax.
  • Tax credit for other dependents goes from zero to $500 nonrefundable.
  • The Family Tax Credits start phasing out at Adjusted Gross Incomes (AGI) of $200,000 (single) and $400,000 (married).

Itemized Deductions

  • The deduction for 1) state and local income taxes; 2) sales taxes; and 3) real estate taxes is limited to $10,000.* The Tax Act prohibits a deduction in 2017 for the prepayment of 2018 state and local income taxes made in 2017.
  • The mortgage interest deduction is limited to the interest on mortgage debt up to $750,000* for all debt incurred after December 14, 2017. The interest on mortgage debt incurred before December 15, 2017 continues to be deductible on debt up to $1,000,000. The deduction for mortgage interest is based on the combined debt for a primary home and a second home.
  • The interest on home equity debt is not deductible, regardless of when it was incurred.*
  • The threshold to deduct out-of-pocket medical expenses decreases from 10% to 7.5% of AGI for all taxpayers in 2017 and 2018. The threshold reverts to 10% in 2019.
  • There is no change to the deduction for charitable contributions other than the 50% of AGI limit is increased to 60% for cash donations to public charities. However, if a taxpayer’s Standard Deduction is higher than the total of Itemized Deductions, there is no tax savings from making charitable contributions.
  • Casualty losses are deductible only if the losses are attributable to a declared national disaster by the federal government. For those who are not in a federal disaster area casualty losses are not deductible.
  • Miscellaneous Deductions (such as tax preparations fees, unreimbursed employee expenses and investment advisory fees) are eliminated.*

Other Items

  • The threshold for estates subject to the 40% estate tax is increased from $5.6 million to $11.2 million per person (or $22.4 million for married couples with portability).*
  • Taxpayers who receive income from Pass-Through Businesses (partnerships, S corporations and sole proprietors- Schedule C) receive a 20% deduction of “qualified business income” from their AGI to calculate their Taxable Income. The deduction is limited to the greater of: 1) 50% of W-2 wage income; or 2) 25% of W-2 wage income plus 2.5% of the cost of tangible depreciable property for a qualifying business, including publicly traded partnerships but not including certain professional service businesses. The above limitations do not apply for those with Taxable Income, before the Pass-Through deduction, below $157,500 (single) and $315,000 (married).*
  • The tax penalty for not having health insurance is eliminated in 2019.
  • The deduction for alimony is eliminated effective in 2019.
  • No changes to 401(k) contributions allowing before-tax contributions of $18,500 and a $6,000 catch up contributions for those 50 and over in 2018.
  • The provision for the exclusion of gain from the sale of a taxpayer’s principal residence remains the same at $250,000 (single) and $500,000 (married) provided the taxpayer lived in the residence for 2 of the last 5 years ending on date of sale. Previous versions of the Tax Act proposed changes to this provision which would have required the taxpayer to live in the residence for 5 out of the last 8 years and would have phased out the exclusion if the taxpayer’s AGI exceeded $250,000 (single) or $500,000 (married).
  • The long-term capital gains and qualified dividends tax rates remain at 0%, 15% and 20%, but are based on different tax brackets (see below). The Net Investment Income Tax remains at 3.8% on investment income for taxpayers with AGI exceeding $200,000 (single) and $250,000 (married). Previous versions of the Tax Act would have required individual investors to dispose of securities on a first-in first-out (FIFO) basis. This FIFO provision was not included in the final Tax Act.

Long-Term Capital Gains and Qualified Dividends Tax Rates (Based on Taxable Income)

Rate Single Married Head of Household
0% 0 to $38,600 0 to $77,200 0 to $51,700
15% $38,601 to 425,800 $77,201 to 479,00 $51,701 to 452,400
20% Over $425,800 Over $479,000 Over $452,400


Education

  • Retains the tax credits for American Opportunity, Lifetime Learning and Hope Scholarship.
  • Retains the student loan interest deduction of $2,500.
  • Retains the deduction for teacher’s classroom expenses at $250.
  • Expands the allowed use of 529 plans to pay for private school expenses for K-12 grades for up to $10,000 per student each year.

Things to consider doing no later than December 31, 2017 to reduce your taxes

If you can defer income into 2018, you may want to do so because your tax bracket may be lower in 2018.

Cash-basis taxpayers can deduct the following expenses on their 2017 tax returns provided they pay or charge on a credit card the expenses no later than 12/31/17:

  • Medical expenses (must exceed 7.5% of AGI to be deductible)
  • Estimated payments for any state or local income taxes due for 2017
  • Payments for real estate taxes:
    • If you are subject to the AMT in 2017, you may not save any federal taxes by paying your income and real estate taxes early.
  • Mortgage payment for January 2018
  • Charitable contributions, including contributions to a donor advised fund. See the following link for more information about donor advised funds. 

Source

Joint Explanatory Statement of the Committee of Conference on the Tax Cuts and Jobs Act (560 pages) 

If you have any questions about the new tax rules, please do not hesitate to contact our office (610-651-2777).

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