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Overview of provisions of the TCJA affecting individuals

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The recently enacted Tax Cuts and Jobs Act is a sweeping tax package. Here’s a look at some of the more important elements of the new law that have an impact on individuals.

 

  • Tax rates. The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • Kiddie tax. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings. This may result in a higher effective tax rate for the child. The highest ordinary tax rate and the net investment income tax applies when trust income reaches $12,900. Now the kids are paying tax like a trust without the protection of a trust.

 

  • Standard deduction. The new law increases the standard deduction.
  • Exemptions. The new law suspends the deduction for personal exemptions.
  • New deduction for “qualified business income.” Taxpayers are allowed a deduction equal to 20% of “qualified business income.”
  • Child and family tax credit. The new law increases the credit for qualifying children.
  • State and local taxes. The itemized deduction for state and local income and property taxes is limited.
  • Mortgage interest. Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000, starting with loans taken out in 2018. This limit applies to the combined amounts of loans used to buy, build, or substantially improve the taxpayer’s main home and second home, including home equity loans, HELOCs, or second mortgages.
  • Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2% of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
  • Medical expenses. For 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income for all taxpayers.
  • Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
  • Overall limitation on itemized deductions. The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds.
  • Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.
  • Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
  • Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
  • Estate and gift tax exemption. The estate and gift tax exemption has been increased.
  • Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals, but the exemption has been increased.

As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your situation, please give me a call.

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