Legislative Alert for 2018

When this book was finalized, Congress had just approved and sent to the President for his signature the Tax Cuts and Jobs Act. Listed below are key proposals for individuals that take effect for 2018 (except where noted) and expire at the end of 2025. See the e-Supplement at jklasser.com for further details on these and other new law provisions for individual taxpayers and business owners.

Tax rates

The top individual income tax rate drops to 37%, with lower rates of 35%, 32%, 24%, 22%, 12% and 10%. Owners of pass-through entities will pay the individual income tax rates on their profits, but subject to several restrictions and limits, a 20% deduction for this income may be available (i.e., qualifying taxpayers pay tax on only 80% of the pass-through income).

The prior-law zero, 15% and 20% maximum rates for net capital gain and qualified dividends are retained, with an inflation adjustment to the 2017 income cutoffs between the zero and 15% rates, and between the 15% and 20% rates.

Standard deduction increased but personal exemptions repealed

The deduction for personal and dependency exemptions is eliminated, but the standard deduction is increased to $24,000 for joint filers, $18,000 for heads of households, and $12,000 for other filers. These amounts will be indexed for inflation for years after 2018. Taxpayers who are age 65 or older or blind may continue to claim the additional standard deduction.

Less generous inflation adjustments

The new law uses the so-called “chained CPI” (the C-CPI-U, rather than the CPI-U which was used under prior law) to figure inflation adjustments. This means that there will be smaller inflation adjustments to the tax rate brackets and the standard deduction, and other amounts subject to inflation adjustments.

Child tax credit

The amount of the child tax credit is doubled to $2,000 per qualifying child, and this is increased by a new nonrefundable $500 credit for a qualifying dependent other than a qualifying child. The AGI phase-out threshold is increased to $400,000 for joint filers or $200,000 for all others; these thresholds will not be indexed for inflation. The refundable portion of the child tax credit is limited to $1,400 (subject to inflation adjustments after 2018) and the earned income threshold for figuring the refundable portion is $2,500.

Deductions from gross income

The deduction for alimony payments (and required inclusion in income for recipient) is eliminated for payments under agreements entered into or substantially changed after 2018. The deduction for moving expenses is also eliminated, except for members of the Armed Forces.

Itemized deductions

The medical expense deduction is retained, with the 7.5%-of-adjusted-gross-income floor applying to all taxpayers for 2017 and 2018; after 2018 the floor will be 10% of AGI.

The cap for deducting mortgage interest for buying or building a first or second home is lowered to $750,000 (from the prior law $1 million cap), or $375,000 if married filing separately (from the prior law $500,000 cap), but the prior law $1 million/$500,000 cap still applies for acquisition indebtedness incurred on or before December 15, 2017. However, interest on home equity debt is no longer deductible.

The aggregate deduction for state and local income taxes (or sales taxes in lieu of income taxes) and property taxes is capped at $10,000 ($5,000 if married filing separately).

The percentage limit for deductible charitable contributions is raised to 60% of AGI for cash donations to public charities, but no deduction is allowed for donations in exchange for college athletic event seating rights.

The casualty loss deduction is eliminated, except for losses in federally-declared disasters. Miscellaneous itemized deductions subject to the 2%-of-AGI floor (such as unreimbursed job expenses for employees, investment fees, tax preparation expenses) are also eliminated. The phase-out of itemized deductions for high-income taxpayers is repealed.

2016 disaster area relief

Special rules are provided for distributions from qualified retirement plans and casualty loss deductions related to a qualified 2016 disaster.

Recharacterizing conversions to Roth IRAs

The ability to unwind a Roth IRA conversion by recharacterizing it back to a traditional IRA (timely filers had until October 15th of the year following the year of the conversion) is no longer allowed (i.e., conversions are permanent). However, taxpayers may still recharacterize an annual contribution to a traditional IRA as a Roth IRA contribution, or an annual contribution to a Roth IRA as a traditional IRA contribution.

AMT

The AMT for individuals is retained, but the exemption amounts are increased to $109,400 for joint filers, $54,700 for married filing separately, and $70,300 for single taxpayers and heads of households. The phase-out threshold increases to $1 million for joint filers and $500,000 for other filers. The exemption amounts and phaseout thresholds will be indexed for inflation after 2018. The 7.5%-of-AGI threshold for medical expenses applies for 2017 and 2018 AMT purposes as well as for regular tax.

Individual health coverage mandate and premium tax credit

The requirement that all individuals have minimum essential health coverage or pay a penalty (unless exempt) is repealed starting in 2019. No changes are made to the premium tax credit.

529 plans

These education savings plans are allowed to make tax-free distributions of up to $10,000 for tuition at elementary and secondary schools. Also, rollovers of funds from 529 plans to ABLE accounts are permitted on a tax-free basis, subject to the overall limit on ABLE account contributions.

Estate and gift tax

The exemption (exclusion) from estate and gift tax is raised substantially, to about $11 million (basic exclusion raised to $10 million and indexed for inflation after 2011). Without the new law, the exclusion for 2018 would have been $5.6 million.

Home sale exclusion and FIFO proposals not in new law

The new law does not include earlier House and Senate provisions that would have extended the length of time that a taxpayer must own and use a principal residence to qualify for the home sale exclusion. Also, the legislation does not include an earlier Senate provision that would have required the first-in, first-out (FIFO) method to be used to figure the basis of securities sold after 2017 except where the average cost basis method is allowed (as with mutual fund shares).