Tax Cuts and Jobs Act

The reconciled tax reform bill, commonly called the “Tax Cuts and Jobs Act” (“TCJA”), was signed into law on December 22, 2017.  The new law also includes significant changes for individual taxpayers, most of which take effect for 2018 and expire after 2025 (absent additional legislation).

Notably, TCJA suspends the overall limitation on itemized deductions for 2018–2025.  In addition, the final/enacted version of TCJA leaves untouched many breaks that prior versions of the legislation would have reduced or eliminated, including:

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

Here is a summary of some of the more pertinent changes that will be implemented as a result of TCJA:

Tax brackets

The TCJA maintains seven income tax brackets but temporarily adjusts the tax rates as follows:

Personal exemptions and standard deduction.  For 2018–2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers.  The standard deduction amounts will be adjusted for inflation beginning in 2019.

Family tax credits.  The child credit has been doubled 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 TCJA also makes the child credit available to more families than in the past because the credit now does not begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers.

State and local tax deduction.  For 2018–2025, those taxpayers that itemize their deductions 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.

Mortgage interest deduction.  For 2018–2025, taxpayers can 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 new law also suspends the deduction for interest on home equity debt, regardless of when the debt was incurred or how it’s used.

Medical expense deduction.  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 for 2018–2025.

Moving expenses.  The deduction for work-related moving expenses is suspended for 2018–2025, 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).

Charitable contributions.  For 2018–2025, the limit on the deduction for cash donations to public charities is raised to 60% of AGI from 50%.

AMT and estate tax.  Beginning in 2018, the new law increases both the AMT exemption amount and the AMT exemption phase-out thresholds.  The TCJA doubles the estate tax exemption to $10 million for 2018–2025 and will continue to be adjusted for inflation.

Attorney Stephen A. Lasky