HERE WE GO AGAIN 

On December 22, 2017, the president signed the Tax Cuts and Jobs Act into law.  At the time, he said it was the “largest tax cut in history.” Others say it will raise taxes.  Which is it?  And the answer is:  It depends.

 

We know that the corporate tax cuts are permeant while the individual tax cuts sunset.  Most sunset in 8 years except health insurance deduction which sunsets in at the end of this year.  If the items are allowed to sunset, individual taxes will definitely go up at that point.  As for 2018, the law is very taxpayer specific.

 

Someone with a lot of dependents or who lives in a high tax state or who has a lot of unreimbursed employee business expenses may see their taxes go up in 2018.  Someone who has just a W-2 and maybe some interest and dividends and who did not previously itemize, their taxes will probably go done.

 

Let’s take a look at some of the individual provisions of this law.  But first, please remember, it is brand new and we are all still trying to figure it out.  Also note that Congress has already acknowledged that there needs to be, what they call, a technical corrections act.  But they also acknowledge that they don’t know what needs to be in it!!!

 

·         New Income Tax Rates & Brackets

The new law lowers most tax rates and expands the brackets

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37

   

·         Standard Deduction Increased

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.

 

·         Personal Exemptions Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.

 

·         Kiddie Tax Modified

For tax years beginning after Dec. 31, 2017, If a child has earned income, it will be taxed at the rates for single individuals. Their investment income will be taxed at  to trusts and estates rates

 

·         LOSS PROVISIONS

.For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act provides that excess business losses are not allowed in the tax year they are generated, but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the passive loss rules.

 

Losses will be allowed if the taxpayers income is low enough.

 

·         Deduction for Personal Casualty & Theft Losses Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster.

 

·         Child Tax Credit Increased

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period.  The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly.   The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation.

 

No credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's SSN

 

·         Non-child dependents. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.

 

·         State and Local Tax Deduction Limited

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity

 

A  taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for state income taxes, real estate taxes or sales taxes. Foreign real property taxes may not be deducted

 

·         Mortgage & Home Equity Indebtedness Interest Deduction Limited

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 taxpayers will not be allowed to deduct interest on a home equity indebtedness.  The deduction for mortgage interest is limited to purchase indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately. Existing loans below $1 million are grandfathered in.  Also certain home purchase loans that were not closed prior to Dec. 15, 2017.

 

·         Medical Expense Deduction Threshold Temporarily Reduced

For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshold on medical expense deductions is reduced to 7.5% for all taxpayers.

 

·         Charitable Contribution Deduction Limitation Increased

For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%.  Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year's ceiling.

 

·         No Deduction For Amounts Paid For College Athletic Seating Rights

 

·         Alimony Deduction by Payor/Inclusion by Payee Suspended

For any divorce or separation agreement executed after Dec. 31, 2018, or where major modifications occur after that date, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

 

·         Miscellaneous Itemized Deductions Suspended

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. This includes the deduction for tax preparation expenses and unreimbursed employee expenses.

 

·         The following items have also been suspended beginning December 31, 2017 and before January 1, 2016

 

Qualified Bicycle Commuting Exclusion

 

Exclusion for Moving Expense Reimbursements

Moving Expenses Deduction except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.

 

Deduction for Living Expenses of Members of Congress

 

·         Repeal of Obamacare Individual Mandate

This repeal is permanent.

 

·         AMT Retained, with Higher Exemption Amounts

 

·         Expanded Use of 529 Account Funds

For distributions after Dec. 31, 2017, "qualified higher education expenses" include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.

 

·         Student Loan Discharged on Death Or Disability

For discharges of indebtedness after Dec. 31, 2017 and before Jan. 1, 2026, certain student loans that are discharged on account of death or total and permanent disability of the student are also excluded from gross income.

           

·         Estate and Gift Tax Retained, with Increased Exemption Amount

For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

 

·         Due Diligence Requirements for Claiming Head of Household

Effective for tax years beginning after Dec. 31, 2017, the Act expands the due diligence requirements for paid preparers to cover determining eligibility for a taxpayer to file as head of household. A penalty of $500 (adjusted for inflation) is imposed for each failure to meet these requirements.