Over the past few months, there have been several different tax reform bills handed back and forth between the two branches of Congress. A finalized bill has now been confirmed and passed in both the House of Representatives and the Senate. This bill, called the Tax Cuts and Jobs Act, is an endeavor to reduce tax for all Americans and promote jobs by reducing specific tax rates, adjusting credits, and removing specific deductions.
The Tax Cuts and Jobs Act, a new bill signed by President Trump on December 22, 2017, was passed in order to promote economic growth. This new bill has changed a variety of different tax rules (which for the most part sunset before 2026) and the following information discusses a few of the substantial changes that will affect a large portion of the population.
Limited Itemized Deductions and Increased Standard Deduction
In recent history, taxpayers have been able to deduct property taxes, vehicle license fees, and state income tax payments on their federal tax return without limit. The new law will reduce this deduction to a maximum of $10,000 combined between state income taxes and property taxes. Many taxpayers who live in California, New York, New Jersey, and other high tax rate states, will likely feel a tax burden as their deductions are substantially reduced. In order to offset this change, the new bill increases the standard deduction for joint filers to $24,000, single filers to $12,000, and head of household filers to $18,000.
In addition to limiting the tax deduction, the following expenses will no longer be allowed on the individual tax return as itemized deductions:
- Miscellaneous Itemized Deductions including:
- Unreimbursed Employee Expenses
- Tax Preparation Fees
- Investment Advisor Fees
- Estate Planning Fees
- Personal Casualty Losses (except for losses in federally declared disaster areas)
In addition to the above changes, any new mortgage debt obtained after December 15, 2017 will be subject to a limitation on acquisition indebtedness beginning at $750,000, down from $1,000,000, and the $100,000 home equity indebtedness interest is now disallowed. Any current mortgage is considered grandfathered and will still be subject to the original $1,000,000 phase-out.
While many of these changes may adversely affect certain taxpayers, there are a few items that will provide a benefit. In 2017 and 2018, the medical expense AGI limit will be reduced to 7.5%. It will increase back to 10% beginning in 2019. Additionally, charitable AGI limits for cash contributions has been increased to 60%, up from 50%. Lastly, the 3% reduction of itemized deductions for taxpayers above a specific threshold, known as the Pease limitation, has been repealed and will no longer apply from 2018 on.
Taxpayers who run their business through an S corporation or Partnership will potentially see an additional deduction for their income that is passed through to their individual tax return. The new bill allows for a deduction of 20% of the taxable income reported by the individual related to the income that has been passed out by the business. There are limits on this deduction, including a complete disallowance for service business owners whose taxable income is over $315,000 for married filing joint and $157,500 for single filers.
Other Notable Changes
In addition to the above changes, the following list of changes will take effect in 2018:
- Alternative Minimum Tax exemption levels have been increased substantially to $70,300 and $109,400 for single and joint filers, respectively, with the phase-out levels now increased to $500,000 and $1,000,000
- Personal Exemptions have been repealed
- Tax bracket rates have been reduced, which includes reducing the highest marginal rate from 39.6% to 37%
- The Child Tax Credit has been increased to $2,000 per child, with the first $1,400 being a refundable credit
- Family Credit added to provide up to a $500 credit for individuals who are dependents but are not qualifying children
- 529 Plans can now be used to pay for grade, private, and high school levels. Limited to $10,000 per year
- Recharacterization of IRAs will no longer be allowed
- Divorce or Separation Agreements executed after December 31, 2018 will result in no deduction for alimony paid, and no requirement to include the alimony income for the receiving spouse
The new tax reform bill provides a variety of changes that may potentially help or harm taxpayers depending on their specific set of circumstances. If you have questions or concerns on how this new bill will affect you, please feel free to call your L&B professional at (858) 558-9200 and we would be happy to discuss these changes with you.