Tax Reform: Impact on Individual Taxpayers

On December 20, 2017, the US Senate and House of Representatives approved the reconciled, final version of the Tax Cuts and Jobs Act. President Trump is expected to sign the bill into law.

While many of the final bill’s provisions affect businesses, it also includes significant changes for individual taxpayers, most of which take effect for 2018 and expire after 2025.

Here are some of the most notable provisions affecting individual taxpayers.

Inflation Adjustments

Annual inflation adjustments will be calculated using the chained consumer price index (C-CPI-U). This will increase tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than the consumer price index currently used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The law adopts the C-CPI-U on a permanent basis.

2018 Tax Brackets

The final bill maintains seven income tax brackets that will continue to be adjusted for inflation but temporarily adjusts the tax rates as follows through 2025.

Tax Brackets

Personal Exemptions and Standard Deductions

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses, and any dependents. If they choose not to itemize deductions, they can also take a standard deduction based on their filing status.

2017 Standard Deductions

  • $6,350 for singles and separate filers
  • $9,350 for head of households
  • $12,700 for married couples filing jointly

For 2018 through 2025, the final bill suspends personal exemptions but roughly doubles the standard deduction amounts.

2018–2025 Standard Deductions

  • $12,000 for singles and separate filers
  • $18,000 for heads of households
  • $24,000 for married couples filing jointly

The standard deduction amounts will be adjusted for inflation beginning in 2019.

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings.

For those with multiple dependents or who itemize deductions, these changes might result in a higher tax bill, depending in part on the extent to which those taxpayers can benefit from the family tax credits.

Family Tax Credits

The child credit was the subject of much debate during the reconciliation process, with some senators pushing to expand it more than either the original House of Representatives and Senate bills did. In the end, the negotiators opted to double the credit to $2,000 per child under age 17 beginning in 2018. The maximum amount refundable—because a taxpayer’s credits exceed his or her tax liability—is limited to $1,400 per child.

The final bill also makes the child credit available to more families than in the past. Under the new law, the credit doesn’t begin to phaseout until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseouts of $110,000 and $75,000, respectively. The phaseout thresholds won’t be indexed for inflation, though, meaning the credit will lose value over time.

Beginning in 2018, a $500 nonrefundable credit will also be available for qualifying dependents other than qualifying children, such as a taxpayer’s parent, sibling, niece, nephew, aunt, uncle, or 17-year-old child.

All of the family tax credit provisions expire after 2025.

State and Local Tax Deduction

The deduction for state income and sales taxes was another point of contention during negotiations, with congressional representatives from high-tax states protesting its proposed elimination. The deduction ultimately survived but has been scaled back substantially—and is still available only to those who choose to itemize. With the increased standard deduction, it’s expected that fewer taxpayers will do so.

Between 2018 and 2025, taxpayers can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and either income or sales taxes. However, the final bill explicitly forbids taxpayers from claiming an itemized deduction in 2017 for prepayment of state or local income tax for a future year to avoid the dollar limitation applicable for future tax years. The bill doesn’t include such a prohibition against prepayment of property taxes for a future year.

Mortgage Interest Deduction

The final bill also tightens limits on the itemized deduction for home mortgage interest. Between 2018 and 2025, it generally allows a taxpayer to deduct interest only on mortgage debt of up to $750,000. However, the limit remains at $1 million for mortgage debt incurred before December 15, 2017, which will significantly reduce the number of taxpayers affected.

The deduction for interest on home equity debt is also suspended. Between 2018 and 2025, taxpayers can’t claim deductions for such interest at all, regardless of when the debt was incurred or how it’s used.

Additional Deductions, Exclusions, and Credits

Here are some other tax breaks that have been affected by tax reform.

Medical Expense Deduction

This itemized deduction will continue and is enhanced for two years. The threshold for deducting such unreimbursed expenses is reduced from 10% of adjusted gross income (AGI) to 7.5% for all taxpayers for both regular and alternative minimum tax (AMT) purposes in 2017 and 2018.

Miscellaneous Itemized Deductions Subject to the 2% Floor

This deduction for expenses such as certain professional fees, investment expenses, and unreimbursed employee business expenses is suspended between 2018 and 2025. For employees that work from home, this includes the home office deduction.

Moving Expenses

The deduction for work-related moving expenses is also suspended between 2018 and 2025, except for active-duty members of the Armed Forces and their spouses or dependents who move because of a military order that calls for a permanent change of station.

The exclusion from gross income and wages for qualified moving expense reimbursements is also suspended, again except for active-duty members of the Armed Forces who move pursuant to a military order.

Personal Casualty and Theft Loss Deduction

Between 2018 and 2025, this deduction is suspended, except if the loss was due to an event officially declared a disaster by the president.

Charitable Contributions

The limit on the deduction for cash donations to public charities is raised to 60% of adjusted gross income (AGI) from 50%. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated. Taxpayers must itemize to benefit from the charitable contributions deduction.

Alimony Payments

Alimony payments won’t be deductible—and will be excluded from the recipient’s taxable income—for divorce agreements executed (or, in some cases, modified) after December 31, 2018. Because the recipient spouse would typically pay income taxes at a rate lower than the paying spouse, the overall tax burden will likely be larger under this new tax treatment. This change is permanent.

529 Plans

Distributions from 529 plans used to pay qualifying education expenses are, generally, tax-free. The definition of qualified education expenses has been expanded to include not just postsecondary school expenses, but also primary and secondary school expenses. This change is permanent.

Notably, the final bill leaves many tax breaks untouched that would’ve been reduced or eliminated under the original House or Senate bills, such as the:

  • Principal residence gain exclusion
  • Exclusion for employer-provided adoption assistance
  • Lifetime Learning credit
  • Deduction for student loan interest
  • Deduction for graduate student tuition waivers

The final bill also suspends the overall limitation on itemized deductions for 2018–2025.

AMT

The House lost the battle over repeal of the AMT. But the final bill makes it applicable to fewer taxpayers.

Beginning in 2018, the new law increases the AMT exemption amount and the AMT exemption phaseout thresholds to the following:

AMT Exemption Amounts

  • $54,700 for separate filers
  • $109,400 for married couples filing jointly
  • $70,300 for singles and heads of households

AMT Exemption Phaseout Thresholds

  • $1 million for married couples
  • $500,000 for all other taxpayers other than estates and trusts

These amounts will be adjusted for inflation until the provision expires after 2025.

Estate Tax

Similarly, the final bill doubles the estate tax exemption to $10 million between 2018 and 2025. The exemption is adjusted for inflation and is expected to be $11.2 million for 2018. But because the exemption doubling is only temporary. Taxpayers with assets in the $5 million to $11 million range—twice that for married couples—will still have to keep estate taxes in mind in their planning.

Roth Conversions

Taxpayers who convert a pretax traditional IRA into a posttax Roth IRA lose their ability to later recharacterize—that is, reverse—the conversion. Those who wish to recharacterize a 2017 Roth conversion must do so by December 31, 2017.

Recharacterization is still an option for other contributions. An individual can make a contribution to a Roth IRA, for example, and subsequently recharacterize it as a contribution to a traditional IRA before the applicable deadline.

We're Here to Help

We'll continue to send you more information about the specific provisions in the legislation and how they could impact you or your business. In the meantime, if you'd like to learn more about how these and other tax law changes will affect you in 2018 and beyond, please contact your Moss Adams professional.

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