December 21, 2017
2018 Tax Law Changes- Individual Provisions
Individual Provisions
- The act's final version retains the seven overall tax brackets, but tax cuts are achieved by cutting the rates themselves. The final version cuts the top rate to 37% as follows:
|
Filing Status |
||||
|
Rates |
Single |
Married Joint |
Married Separate |
Head of Household |
|
10% |
Up to $9,525 |
Up to $19,050 |
Up to $9,525 |
Up to $13,600 |
|
12% |
$9,525 to |
$19,050 to |
$9,525 to |
$13,600 to |
|
22% |
$38,700 to |
$77,400 to |
$38,700 to |
$51,800 to |
|
24% |
$82,500 to |
$165,000 to |
$82,500 to |
$82,500 to |
|
32% |
$157,500 to |
$315,000 to |
$157,500 to |
$157,500 to |
|
35% |
$200,000 to |
$400,000 to |
$200,000 to |
$200,000 to |
|
37% |
Over $500,000 |
Over $600,000 |
Over $300,000 |
Over $500,000 |
- The standard deduction is increased to $24,000 for married taxpayers filing jointly; $18,000 for single filers with at least one qualifying child (Head of Household filers); and $12,000 for single filers and includes enhancements for the elderly and the blind.
- Personal exemptions are repealed and merged in with the higher standard deduction.
- The Child/Dependent Tax Credit will be $2,000 with $1,400 refundable. Modified income limits will make the credit available to more families and a $500 credit will be available for a non-child dependent.
- The Kiddie tax is simplified by applying the trust and estate rates (reflected below) to the unearned income of a child.
- The capital gain and dividend rates are maintained at 20%, plus the 3.8% surtax, where applicable.
- The act retains a modified Individual Alternative Minimum Tax (AMT) as of 2018 and provides for increased exemptions and higher phase out limitations. The limits are indexed for inflation. The new law will change the impact of AMT and should reduce the number of affected taxpayers.
- There are significant changes to itemized deductions. The "Pease" limitation, which previously limited up to 80% of most itemized deductions, has been repealed. Instead, most itemized deductions are either eliminated or modified, such as:
- The deduction for non-business state and local income, sales and property taxes will be limited to $10,000 in aggregate ($5,000 for married taxpayers filing separately). This provision potentially harms taxpayers living in high income and property tax states.
- The deduction for medical expenses has been retained and will be enhanced. The act lowers the threshold for the deduction to 7.5% from 10% of adjusted gross income for tax years 2017 and 2018.
- The act repeals all miscellaneous itemized deductions that were previously subject to the 2% floor. Miscellaneous deductions included investment fees, tax preparation expenses and unreimbursed employee business expenses. However, the deduction for investment interest expense remains unchanged.
- The deduction for personal casualty and theft losses is repealed, except for losses resulting from federally declared disasters.
- The adjusted gross income limit on cash contributions is increased from 50% to 60%.
- 529 Savings Plans can be withdrawn tax-free if used for higher education expenses. The act now allows up to $10,000 per year to be used for elementary and high school tuition and funds to be used for private and religious schools.
- The deduction for mortgage interest is subject to the following rules:
- Interest on acquisition debt currently in existence can be deducted under current rules.
- The $1 million debt limit is reduced to $750,000 for debt incurred after December 15, 2017, and will only include mortgage interest deduction on a principal residence and second residence.
- Home equity interest will be nondeductible.
- The final act includes a repeal of the Shared Responsibility Payment (Individual Mandate) under the Affordable Care Act after 2018.
- While the above-the-line educator costs is not repealed, the act eliminates many tax credits and income exclusions, including:
- Moving expenses other than those in Armed Forces.
- Deduction or alimony payments effective for any divorce decree or separation agreement executed or modified after 2018.
- Exclusion for employee achievement awards.
- Elimination of the Deduction for Domestic Production Activities.
- Credit for clinical testing expenses for certain drugs for rare diseases or conditions is reduced to 25%.
- Rehabilitation credit is not completely repealed, but limited to 20% for certified historic structures and repealed for pre-1936 non-historic structures.
- Disabled Access Credit.
- Retain and simplified the Earned Income Tax Credit to improve efficiency.
Observations
All of the individual tax changes under the new law are generally effective beginning in 2018 and are temporary and expire after 2025. If Congress does not act at that time to extend these provisions, starting in 2026, the new provisions will lapse and the current rules will return.
Due to the changes described above, many taxpayers will no longer opt to itemize deductions. The beneficial tax rates on long-term capital gains and qualified dividends continue to apply.
High wage earners in high tax states will likely see higher tax bills. Conversely, a similar taxpayer residing in a low tax state will likely see a tax savings due to the lower top rate and the expanded 35% tax bracket.
Potential Steps to take as a result
Charitable gifts could be worth more in 2017 instead of 2018 due to the change in the rates.
Consider paying state & local taxes but not the point of state tax refunds, since refunds would will likely be taxable.
Consider Pay off sizable medical expenses before the end of the year.
Consider prepay student loan interest.
Educators Consider paying classroom-related expenses early.
Consider accelerate other expenses that would qualify as itemized deductions.
Get your retirement plan contributions done.
Going beyond tax-reform-related moves, if you're part of a 401K or other employer sponsored retirement plan, making sure you get as much money as possible into your account can cut your taxes. The general maximum you can set aside for most plans is up to $18,000 in wages, with those who are 50 or older getting to save an additional $6,000 if they choose. Unlike IRAs, 401(k) contributions must be completed by Dec. 31, so talk to your HR department to see if you can get more money taken out of your end-of-year paychecks in order to take maximum advantage.
Get your portfolio losers sold.
Losses on investments are deductible against gains, reducing the amount of tax you'll pay on winning investments that you've sold during the year. To claim your loss, you need to sell the losing stock by Dec. 31, and then make sure not to buy it back within 30 days. Even if you don't have gains on other investments, up to $3,000 in capital losses is available for offsetting other types of income.
Arrange to have income deferred into next year.
Most people can't control when they get their paychecks, but some entrepreneurs and self-employed workers have the ability to time their income to some extent. If you think that tax rates will be lower for you in 2018, then deferring income until after 2017 can be a smart move. How exactly to accomplish this depends on the accounting method that you use in your business and a host of other issues, so make sure to consult your tax professional to decide exactly how to implement an income-deferral strategy.
Make sure you're not going to owe a tax penalty.
Last but not least, it's important to estimate your taxes and make sure that you've had enough taxes withheld to avoid penalties. The general rule is that if you've had at least 100% of your prior-year tax liability withheld, or 90% of what you'll end up owing this year, you won't owe a penalty. But other requirements apply to high-income taxpayers. If you're short, then boosting your income tax withholding from your paycheck can be the best way to remedy the situation.
Finish the year tax-strong
No one wants to think about taxes during the holiday season, but making these moves before 2018 begins is crucial to ensure you won't run into nasty surprises. Keep your eyes on Washington to see what emerges on the tax-reform front, but be prepared to take action -- even if there's no final resolution -- to cover your bases.
The $6,318 tax bonus millions of Americans completely overlook
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