Know what’s in it for you? The Tax Cuts and Jobs Act (H.R.1) was signed by President Trump on December 22, 2017. The most sweeping changes to the U.S. tax code in decades impact virtually every taxpayer. This historic bill calls for lowering the individual and corporate tax rates, repealing the individual shared responsibility requirement of the Affordable Care Act (ACA), as well as countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more. Generally, most provisions of the Act take effect in 2018. Here are the details of the sweeping tax reform updates undertaken by Congress in more than 30 years.
Tax Cuts and Jobs Act changes for Individuals:
Tax Brackets:
The number of tax brackets remains at seven; however, the tax rates and income covered have changed.
For individuals, the following tax rates apply:
- 10% up to $9,525
- 12% up to $38,700
- 22% up to $82,500
- 24% up to $157,500
- 32% up to $200,000
- 35% up to $500,000
- 37% over $500,000
Tax Cuts and Jobs Act changes for married couples filing jointly
, the following rates apply:
- 10% up to $19,050
- 12% up to $77,400
- 22% up to $165,000
- 24% up to $315,000
- 32% up to $400,000
- 35% up to $600,000
- 37% over $600,000
Standard Deduction: The standard deduction increases to from $6,350 (2017) to $12,000 for individuals, from $9,300 (2017) to $18,000 for heads of household and from $12,700 (2017) to $24,000 for married couples.
Personal Exemption: The deduction for personal exemptions is repealed through 2025.
Child Tax Credit: The Child Tax Credit increases to $2,000 from the current $1,000. An additional $500 credit is provided for each non-child dependent. Also, Social Security numbers for children are required before claiming the enhanced credit.
Alternative Minimum Tax: The AMT remains but exemption amount increase to $70,300 for individuals and $109,400 for married filing jointly, affecting fewer taxpayers.
Capital Gains and Dividends: The maximum tax rate remains at 23.8% (20% plus the 3.8% Medicare tax for taxpayers with income above $200,000 or $250,000 married filing jointly). The 20% capital gains income threshold increases to $425,800 for other individuals ($479,000 for married taxpayers filing jointly).
Estate Tax: The exemption (currently $5.5 million) immediately doubles to $11.2 million in 2018 and remains at this level for the next six years, after which time the estate tax is eliminated completely (the tax year 2026 and beyond).
Education-Related Tax Credits and Deductions: 529 Savings Plans are expanded to allow some funds (up to $10,000 for certain expenses) to be used for K-12 education. Rollovers to Achieving a Better Life Experience (ABLE) Sec. 529A accounts will be allowed as well. The student loan interest deduction remains.
Mortgage Interest Deduction: Remains but with a few changes such as allowing interest deduction for up to $750,000 (currently $1 million) in mortgage principal on new homes. Existing mortgages are grandfathered in. Homes entered into a contract before December 15, 2017, and closed on by April 1, 2018, are able to use the prior limit of $1 million.
Home-equity loans: The home-equity loan interest deduction is repealed through 2025.
State and Local Income Tax Deduction: Preserved, however, the deduction is allowed for up to $10,000 a year in state and local income or property taxes.
Note: Taxpayers who prepay 2018 state income taxes, a common tax planning strategy, cannot take the prepaid 2018 amount as a deduction on their 2017 tax returns.
Charitable Contributions: Deductions for charitable donations remain; however, for charitable contributions of cash to public charities the percentage of income limit increases to 60%.
Medical Expense Deductions: The Medical expense deduction (currently 10% of AGI) is temporarily lowered to 7.5% of income for tax years 2017 and 2018.
Miscellaneous Deductions: Many are repealed through 2025 including those relating to tax preparation, alimony payments (after December 31, 2018), and moving expenses with the exception of the moving expense reimbursement for members of the Armed Forces on active duty who move because of a military order.
Adoption Tax Credit. Remains.
Electric Vehicles: The $7,500 tax credit (Sec. 30D) for the purchase of electric vehicles remains.
Individual Healthcare Mandate: Penalty is eliminated for tax years starting in 2018.
Tax Cuts and Jobs Act For Businesses:
Corporate Tax Rate: Starting January 1, 2018, the corporate tax rate is reduced to a flat rate of 21% (down from 35%). The corporate AMT is repealed.
Territorial Taxation: Companies with offshore earnings, currently taxed at a 35% rate, would transition to a territorial tax system. Under the tax reform bill income derived from offshore earnings, if repatriated, would be subject to an effective tax rate of 15.5% for earnings held in liquid assets (i.e. cash) and 8% for illiquid (other) assets.
Interest for Business: Small businesses (under $25 million) retain the ability to write off interest on loans subject to limitations.
Expenses for Business: Businesses would be allowed to immediately write off the full cost of new equipment at 100% through the tax year 2022, after which it would be phased down over a four-year period.
Business Entertainment Expenses Deduction: The deduction for business entertainment expenses is eliminated.
Pass-through Entities: The tax rate on pass-through business entities is reduced to a maximum of 20% for tax years starting January 1, 2018, and ending on December 31, 2025.
Low-income Housing Tax Credit. Remains.
Research & Development Tax Credit. Remains.
Work Opportunity Tax Credit. Remains.
Endowment Assets: A 1.4% excise tax is imposed on investment income derived from endowment funds at private colleges and universities. An exclusion is provided for an institution with less than 500 full-time equivalent students whose endowment (fair market value) is less than $500,000 per student.
