The Tax Cuts & Jobs Act is Passed – How Will These Changes Affect You?
In our last article, The Congressional Tax Plans & 2017 Year End Individual Planning Considerations, we laid out some considerations that all taxpayers should look at, in view of the pending tax changes, as the year was coming to a close. Now that the House and Senate have passed the plan and sent it to President Trump for his signature, we want to highlight some of the major changes that are included in the Tax Cuts and Jobs Act.
- Tax Brackets – The final tax bill calls for the following tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. For comparison purposes, the tax brackets for 2017 are: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- Personal Exemptions and the Standard Deduction – Personal Exemptions ($4,050 per dependent for 2017) are eliminated and the Standard Deduction will be increased for all filing statuses ($12,000 Single, $24,000 Married Joint, and $18,000 Head of Household).
- Home Acquisition and Home Equity Indebtedness – The final tax bill limits the deduction on mortgage interest to mortgages valued at $750,000 or less (the current cap is $1 million). With that said, acquisition indebtedness incurred before December 15, 2017 will still qualify for the $1,000,000 limitation (subject to special rules). Finally, the bill eliminates the deduction for home equity loans. However, some good news does exist. It does not appear that there are any changes limiting the deduction to a taxpayer’s primary residence only. This means that vacation home indebtedness is still deductible.
- State and Local Tax Deduction – The original House and Senate proposals allowed up to a $10,000 deduction, but only for property taxes. Fortunately, the final tax bill calls for up to a $10,000 tax deduction which can be made up of state and local income taxes, property taxes, or both.
- Miscellaneous Itemized Deductions (Subject to 2% AGI Limitations) – These deductions (e.g., Investment Advisor fees, Safe Deposit Box fees, Hobby Expenses, etc.) are eliminated starting 1/1/18 until the close of the 2025 tax year (on 12/31/25).
- Overall Limitation on Itemized Deductions – In the past, upper-income taxpayers were subject to a reduction in their total itemized deductions once certain income thresholds were passed. Effective for taxable years beginning after 12/31/17, this limitation is eliminated.
- Child Tax Credit – The amount of the credit has been increased to $2,000 (as compared to $1,000 for 2017). However, the maximum refundable amount may not exceed $1,400 per child. Additionally, for Married Filing Joint taxpayers, the phase-out threshold changes from when the taxpayer’s AGI exceeds $110,000 (2017) to when it exceeds $400,000 (2018).
- Alimony – For Divorce or Separation instruments executed after December 31, 2018, there are big changes regarding the treatment of Alimony. The payor will no longer receive a deduction from income and the recipient will no longer report Alimony as taxable income.
What do the Changes Mean for You Today?
At this point, the changes mentioned above have no impact on the filing of a taxpayer’s 2017 tax return. Instead, the impact will be felt much further down the road, when taxpayers start filing their 2018 tax returns in early 2019. With that said, it doesn’t mean that a wait and see approach is recommended. There are important planning considerations that should be examined, before the close of 2018, aimed at maximizing the value and timing of a taxpayer’s deductions. As we head into the New Year, let Cover & Rossiter assist you in developing a tax strategy which will maximize your current deductions, with an eye towards the future!
Andrew Johnson, CPA