Tax Reform Update: How does the TCJA Impact Individuals?
posted Sep 10, 2018 by Laura H. Yalanis, CPA, MST in the Global Tax Blog
It’s been a while since the Tax Cuts and Jobs Act (TCJA) was first introduced. Here is a refresher on what has changed for individuals in 2018 and beyond.
Reference guide on the major issues and how the TCJA impacts them
ACA individual mandate penalty - The TCJA permanently repeals the penalty for failure to obtain minimum essential health coverage, starting in 2019.
Alimony payments- The TCJA permanently eliminates deductions for alimony payments required by post 2018 divorce agreements and the requirement that individuals must report alimony payments as taxable income.
Alternative Minimum Tax- The AMT is sticking around for individuals. The exemption amount and the exemption phase out thresholds have been raised. Check out our recent blog for more on this: Tax Reform FAQs: Is the AMT Repealed? .
Capital gains and qualified dividend rates- The TCJA retains the prior maximum rates on net long term capital gains and qualified dividends, as well as the 3.8% net investment income tax (NIIT) for higher income earners.
Charitable contributions- Income based limits for individuals have increased from 50% to 60%. There is concern that larger standard deductions may remove the tax incentive to donate to charity.
Child tax credit- This credit has been doubled to $2,000 per qualifying child. The TCJA introduces a new $500 credit that may be available for other dependents, like a disabled child of any age, a full time student under the age of 24, etc.
Dependent exemption- The TCJA suspends this deduction.
Discharges for student loan debt- The rules have been modified to allow for the exclusion of student loan debt from income on account of death or disability.
Family and medical leave- The TCJA introduces a new credit (available only in 2018 and 2019) to motivate employers to offer up to 12 weeks of paid family and medical leave for eligible employees.
Federal estate tax- The TCJA increases the unified estate and gift tax exemption from $5 million to $10 million (indexed every year for inflation). This year the exemption, indexed for inflation, is $11.18 million (or $22.36 million for married filing jointly)
What about the GST? The generation skipping transfer tax exemption has been increased to the same amount as the unified estate and gift tax exemption. For more, read How does Tax Reform Impact Estate Planning?
Gambling related expense deductions- This TCJA adds limitations to this deduction—You can now only deduct losses up to the amount of your winnings. Any excess loss cannot offset other highly taxed income. Thus, those in the trade or business of gambling, may no longer deduct non-wagering expenses, such as travel expenses or fees, to the extent those expenses exceed gambling gains.
Hobby loss deductions- The TCJA suspends itemized deductions for hobby-related expenses.
Home equity loans- The TCJA suspends the deduction for interest paid on home equity debt, unless the proceeds are used to buy, build or substantially improve the primary residence secured by the debt.
Itemized deduction- There is no longer a tax benefit for itemizing deductions for many people since the standard deduction has been increased. The itemized deduction phaseout rule for high-income taxpayers has been suspended. Check out our blog, The New Tax Law and its Impact on Itemized Deductions for more.
Kiddie tax- These rules have been simplified by the TCJA. Earned income will now be taxed based on rates for single taxpayers and unearned income above the annual threshold will be taxed based on rates for trusts and estates.
Like kind exchanges- The TCJA eliminates favorable treatment under Section 1031 for exchanges of personal property. Real property exchanges still get favorable treatment.
Loan balances for former employees- Departing employees with outstanding 401(k) loan balances are now allowed until their tax return filing due date to repay them (or contribute the outstanding balance to an IRA or qualified retirement plan) to avoid taxes and penalties.
Medical expense deduction- The AGI (adjusted gross income) threshold for itemized medical expense deductions (previously 10%) has been reduced to 7.5%.
Miscellaneous expense deductions- Itemized deductions for such items as tax prep costs, investment expenses, union dues and unreimbursed employee business expenses have been suspended.
Mortgage interest deductions- The TCJA limits the deduction to interest paid on the first $750,000 of home acquisition debt (down from $1 million). This generally starts with loans taken out after December 15, 2017. Read, Tax Reform FAQs: Is Home Mortgage Interest Still Deductible? for more.
Moving expense deduction- Job related moving expenses will no longer be deductible, except for certain military personnel. The income exclusion for moving expense reimbursements from employers has also been suspended. Read more in our blog, Buying/Selling Home? Keep these Tax Tips in Mind
Personal casualty loss deduction- This deduction is allowed only in a federally declared disaster.
Personal exemption- This is suspended. Read Tax Reform FAQs: Are Personal Exemptions and Standard Deductions Still Allowed? for more information.
Roth IRA conversion re-characterization- Reversing ill-advised Roth conversions done in 2018 and beyond (to avoid the conversion tax hit) is now permanently disallowed.
Section 529 plans- Distributions from 529 plans of up to $10,000 per year are allowed for an account beneficiary’s tuition at a public, private, or religious elementary or secondary school.
Standard deduction- The standard deduction has been nearly doubled ($12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers). See, Tax Reform FAQs: Are Personal Exemptions and Standard Deductions Still Allowed?
State and local tax deduction- The SALT deduction has been limited to $10,000 annually for combined state and local property and income taxes. See, The New Tax Law and its Impact on Itemized Deductions
Tax rates and brackets- Most individual income tax rates are reduced under new tax law. There are now seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%. See, 2018 Tax Reform Provisions for Individuals.
Withholding- Taxpayers must reassess withholding from regular paychecks or quarterly estimated tax payments for other sources of income. Our blog, Updated 2018 Tax Withholding Tables Now Available is helpful.
Any other changes on the horizon?
House Republicans have promised to introduce additional legislation later this year that would make individual tax cuts under the TCJA permanent. In the meantime, take time to meet with your tax advisor to understand all the changes above.
Questions? Contact us.