Rates and standard deductions

The new law sticks with seven income tax brackets, but adjusts the respective tax rates from the prior-law 10%, 15%, 25%, 28%, 33%, 35% and 39.6% to 10%, 12%, 22%, 24%, 32%, 35% and 37%, respectively. The highest rate will apply when taxable income exceeds $500,000 for single filers and $600,000 for joint filers. These adjusted rates apply through 2025, at which time they will return to the prior-law rates — absent congressional action.

The TCJA almost doubles the standard deduction amounts, to $12,000 for single filers and $24,000 for joint filers, through 2025. The standard deduction amounts will be adjusted for inflation beginning in 2019.

Family tax credits

Under the previous tax regime, taxpayers were able to claim a personal exemption of $4,050 each for themselves, their spouses and any dependents in 2017. The TCJA eliminates that exemption for 2018–2025, turning to family tax credits to help make up for it.

It temporarily increases the child credit to $2,000 per child under age 17, with $1,400 per child refundable should the credit exceed actual tax liability. The law also extends the credit to more families by raising the phaseout thresholds to $400,000 adjusted gross income for married couples and $200,000 for all other filers. But the credit will lose value over time, because the thresholds won’t be adjusted for inflation before it expires after 2025. The TCJA also adds a temporary $500 nonrefundable credit for qualifying dependents other than children eligible for the child credit.

Deductions and exclusions

Many people and organizations raised objections to some of the deductions and exclusions that Congress considered cutting. In the end, many tax breaks that had provoked the most protest were maintained in some form.

For example, the TCJA preserves, but restricts, the deduction for state income and sales taxes, limiting it to no more than $10,000 for the total of state and local property taxes and income or sales taxes, through 2025. But the deduction is available only to filers who itemize their deductions, and the law is explicitly designed to reduce the number of itemizing taxpayers.

The mortgage interest deduction also survives in a limited form. Taxpayers can deduct interest only on mortgage debt of $750,000 ($1 million for mortgage debt incurred before December 15, 2017). Deductions for interest on home equity debt, though, are prohibited for 2018 through 2025, regardless of when incurred.

The medical expense deduction — at one point targeted for repeal — not only lives on temporarily but was expanded for 2017 and 2018. In those years, the threshold for deducting such unreimbursed expenses is reduced from 10% of adjusted gross income to 7.5%.

The moving expense deduction, on the other hand, was generally suspended through 2025, as was the exclusion, from gross income and wages, of employer-provided qualified moving expense reimbursements. But the principal residence gain exclusion was left intact, after Congress debated limiting its availability.

The deduction for personal casualty and theft losses remains, but is only allowed for casualty losses when they’re caused by an event the President officially declares a disaster. And the TCJA removes the deduction for alimony payments, while also excluding the payments from a recipient’s taxable income, for agreements reached after 2018.

Stay tuned

With legislation as sweeping as the TCJA, many of those affected have questions about how the multitude of provisions will interplay to affect their bottom lines. Your tax advisor can help you make the right moves to minimize your tax liability.

Sidebar: What about the alternative minimum tax (AMT) and estate tax?

The TCJA keeps both the AMT and the estate tax but narrows the number of taxpayers who will fall prey to them. For the AMT, it temporarily increases the exemption amount to $109,400 for married couples (50% of that amount, or $54,700, for married individuals filing separately) and $70,300 for all other taxpayers (except estates and trusts). It also increases the phaseout thresholds ($1 million for married couples and $500,000 for all other taxpayers except estates and trusts). These amounts will be adjusted for inflation. The estate tax exemption also is doubled through 2025, to an inflation-adjusted $10 million. As of this writing, the 2018 exemption amounts have not been released, although they are expected to be $11.2 million per person ($22.4 million for married couples).

© 2018