The following is a summary overview of some of the important changes to individual taxation in the new legislation. All changes are effective for tax years beginning in 2018 unless specifically noted, with a general phase out on January 1, 2026.
Rates: There are now seven individual brackets.
- 10%, up to $9,525;
- 12%, $9,525 to $38,700;
- 22%, $38,700 to $82,500;
- 24%, $82,500 to $157,500;
- 32%, $157,500 to $200,000;
- 35%, $200,000 to $500,000;
- 37%, $500,000 and up.
- Married Filing Jointly
- 10%, up to $19,050;
- 12%, $19,050 to $77,400;
- 22%, $77,400 to $165,000;
- 24%, $165,000 to $315,000;
- 32%, $315,000 to $400,000;
- 35%, $400,000 to $600,000;
- 37%, $600,000 and up.
Capital gains rates remain 0%, 15%, and 20%. The 20% breakpoint is $425,800 for Single and $479,000 for Married Filing Jointly.
Standard Deduction: The standard deduction is $24,000 for Married Filing Jointly, $18,000 for Head of Household, and $12,000 for other taxpayers.
Personal Exemptions: The deduction for personal exemptions is $0.
Kiddie Tax: Kiddie tax is triggered with unearned income over $2,100. Taxable unearned income is subject to the trust and estate rates.
Net Operating Losses: NOLs arising in tax years ending after 2017 may only be carried forward, no longer back. Only a two-year carryback for certain farming losses is allowed. The NOLs can be carried forward indefinitely, whereas previously they expired after 20 years. Moreover, the NOL deduction is limited to 80% of taxable income determined without regard to the deduction.
Education: For 529 plan purposes, qualified expenses now include tuition at an elementary or secondary public, private, or religious school up to $10,000 per year. Thus 529 plans are no longer for just college and beyond expenses.
Home Mortgage Interest: The deduction for mortgage interest is limited to debt of up to $750,000. It is $375,000 for Married Filing Separately. The deduction is available for new mortgages on first and second homes on debt up to a total of $750,000. Problems may arise with refinancing, particularly if additional funds are taken out to cover closing costs. The result could be a new loan not grandfathered into the legislation. Make sure to give me a call regarding any mortgage financing so that the maximum interest will be able to be deducted.
State and Local Taxes: The limit for itemized deductions consisting of state/local property taxes and state/local income taxes (or sales taxes in lieu of income taxes) is $10,000 ($5,000 for Married Filing Separately). On July 17, 2018, New Jersey, New York, Connecticut, and Maryland sued to have this $10,000 cap ruled unconstitutional and unenforceable. We need to stay tuned.
Miscellaneous Itemized Deductions: If you itemize, you will not be able to take the miscellaneous deductions previously subject to the 2% of AGI floor. Examples of the lost deductions follow.
- Appraisal fees for a casualty loss or charitable contribution;
- Casualty and theft losses from property used in performing services as an employee;
- Clerical help and office rent in caring for investments;
- Depreciation on home computers used for investments;
- Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust;
- Fees to collect interest and dividends;
- Hobby expenses;
- Indirect miscellaneous deductions from pass-through entities;
- Investment fees and expenses;
- Loss on deposits in an insolvent or bankrupt financial institution;
- Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed;
- Repayments of income;
- Safe deposit box rental fees;
- Service charges on dividend reinvestment plans;
- Trustee’s fees for an IRA, if separately billed and paid;
- Tax preparation expenses; and
- Unreimbursed expenses attributable to the trade or business of being an employee.
Individual Alternative minimum Tax: The individual AMT survived with the exemption amounts increased to $70,300 for Single Filers and $109,400 for Married Filing Jointly.
Medical Expenses: For 2018, the floor for medical expenses is 7.5% of AGI. It returns to 10% in 2019. Any non-emergency medical procedures should be scheduled accordingly.
Alimony: For a divorce or separation agreement executed after December 31, 2018, or one executed before December 31, 2018 but modified after (as long as the modification expressly provides that the new amendments apply), alimony will not be deductible by the payor and not included in the income of the payee.
Individual Mandate: After December 31, 2018, the individual mandate pursuant to the Affordable Care Act is repealed. Repeal is permanent. The 3.8% net investment income tax and 0.9% Medicare tax remain.
Stock Options: A qualified employee can elect to defer for income tax purposes, but not for FICA or FUTA, recognition of income for qualified stock transferred to employee from employer. Detailed notices and other requirements apply.
Employee Achievement Awards: An employee achievement award is tax-free to the employee if the award is deductible by the employer. An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation. Tangible personal property does not include the following:
- Cash or cash equivalents;
- Gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer);
- Vacations, meals, lodging, tickets to theater or sporting events; and
- Stocks, bonds, other securities, or other similar items.
Please contact us with any questions about your 2018 personal tax return.