Analyzing The Impact Of The Tax Cuts and Jobs Act On Individual Taxpayers In 2018
With the passage and implementation of the Tax Cuts and Jobs Act (TCJA), comes a lot of changes for taxpayers to wrap their heads around – but we’re up to the challenge.
Even with all the information floating around these days, it’s easy to overlook or misinterpret how the law works, which is why we’re working hard to understand the new tax reform law backwards and forwards so you don’t have to. Don’t worry; we’ll pass the really important tips and insight on to you.
This article will zero in on key individual tax reform provisions.
Let’s get into the thick of it.
Tax Rate Deductions
The cornerstone of the TCJA is the reduction of individual tax rates. Yes, while the number of tax brackets have, indeed, held steady at seven, each rate has slightly decreased. That being said, remember that these tax rates are still progressive, which means the taxes you pay increases with your income.
Rates Under TCJA |
Single Return |
|
10 percent |
$0 to $9,525 |
|
12 percent |
$9,525 to $38,700 |
|
22 percent |
$38,700 to $82,500 |
|
24 percent |
$82,500 to $157,500 |
|
32 percent |
$157,500 to $200,000 |
|
35 percent |
$200,000 to $500,000 |
| 37 percent |
More than $500,000 |
Additionally, the TCJA has restructured and greatly simplified the Kiddie Tax regulations. Moving forward, the tax on unearned income of children is subject to the trusts and estates tax rates rather than the parent’s marginal rate. In other words, the child’s tax is no longer affected by the parent’s tax situation or the unearned income of any siblings.
Standard Deduction
Here’s a bit of good news. The standard deduction is set to increase across the board … like, a lot.
- Married Filing Jointly/Surviving Spouse: $24,000
- Heads of Households: $18,000
- Single: $12,000
- Married Filing Separately: $12,000
Additionally, the deduction for the elderly and the blind remains intact.
Personal Exemption
The TJCA has repealed the personal exemption. Furthermore, the filing threshold requirements have been changed, which means you won’t have to file until your gross income for the year exceeds the standard deduction. You will also see that the rules for withholding income tax on your wages will be adjusted to reflect this change.
Read Also: Tax Cuts and Jobs Act Doubles Lifetime Exemption Amount
Itemized Deductions
Itemized deductions have been impacted by the TJCA with some being modified or completely eliminated. Be sure to pay extra attention to which ones have been limited, modified or eliminated, as this could significantly impact your tax situation.
- Pease Limitation: The overall limit on itemized deductions for high income taxpayers, also known as the Pease limitation, has been totally repealed (until 1/1/2026).
- Medical Expenses: For 2017 and 2018, medical expenses are deductible to the point that they surpass 7.5 percent of adjusted gross income. Then, come 2019, the threshold will increase to 10 percent of adjusted gross income.
- Home Mortgage Interest: This provision will undergo multiple changes. Now, only mortgage interest to acquire, construct or substantially improve a primary residence or second home is included in the calculation of the deduction. Also, as of Dec. 31, 2017, the acquisition indebtedness is reduced to $750,000 for new mortgages after Dec. 15, 2017. Additionally, taxpayers are no longer allowed to deduct interest paid on home equity indebtedness. IRS made a clarification on Feb. 21, 2018, indicating home equity indebtedness is allowed if it is secured by the home and used to build, buy or substantially improve the home.
Check out this informative slideshow for additional insight … or view the webinar outlining the individual provisions outlined in the TCJA.
Alternative Minimum Tax
The alternative minimum tax (AMT) is calculated using a different set of tax rules. Using the AMT rules, the taxpayer is responsible for whichever is higher – the AMT or regular income tax. That being said, the calculation rules of the individual AMT remain unchanged, for the most part. The only modification is that the exemption amounts and phase-out amounts have been altered.
Filing Status |
AMT Exemption Amount |
AMT Phase-Out |
|
Married Filing Joint |
$109,400 |
$1,000,000 |
|
Single or Head of Household |
$70,300 |
$500,000 |
|
Married Filing Separate |
$54,700 |
$500,000 |
Child Tax Credit
The child tax credit will double under the TCJA to $2,000 per child with up to $1,400 being refundable for families who do not fully utilize the $2,000 per child. Another important change resulting from the recent tax reform legislation is that the credit will now be available to many more households thanks to the boost given to the phase out thresholds. In the past, the credit wasn’t available to married couples with adjusted gross income more than $110,000 and for single filers with adjusted gross income greater than $75,000. The following chart illustrates the new Child Tax Credit phase out thresholds.
Tax Filing Status |
Maximum Adjusted Gross Income for Full Credit |
Adjusted Gross Income Where Credit Disappears |
|
Married Filing Jointly |
$400,000 |
Greater Than $440,000 |
|
Single |
$200,000 |
Greater Than $240,000 |
|
Head of Household |
$200,000 |
Greater Than $240,000 |
|
Married Filing Separately |
$200,000 |
Greater Than $240,000 |
If, for example, your adjusted gross income falls between the two thresholds, you will still be able to claim a partial credit. In this scenario, each child tax credit you would qualify to receive would be reduced by $50 for every $1,000 your modified adjusted gross income exceeds the lower threshold.
Alimony Payments
Alimony payments for any divorce or separation executed or modified after Dec. 31, 2018, will no longer be deductible under the TCJA. This means payments are no longer taxable to the recipient and are not deductible by the payer. This means, any divorce that is finalized before the end of 2018 would ultimately benefit the divorcing couple and hurt the IRS. The following scenarios show the impact of this particular provision in action.
For this exercise, we will assume that Jack’s (soon-to-be ex-husband) tax bracket in 2019 will be 32 percent and the tax bracket for Sally’s, (soon-to-be ex-wife) tax bracket in 2019 will be 24 percent. (The point ultimately being that Sally’s is lower than Jack’s tax bracket.) The breakdown would look a little like this:
Scenario 1 (current rules in play)
Alimony Breakdown for Divorces finalized in 2018 |
|
|
For every $1,000 Jack pays Sally. |
For every $1,000 Sally receives from Jack. |
|
Jack is able to save $320 in taxes. |
Sally pays the IRS $240 in taxes. |
|
Net alimony cost to Jack is $680. |
Net alimony benefit to Sally is $760. |
Because the IRS ultimately loses $320 on Jack’s tax deduction, but receives $240 on Sally’s payment, the IRS is ultimately on the hook for the remainder, meaning:
Net cost to the IRS = $80 |
|
Scenario 2 (rules under the TCJA in play)
Alimony Breakdown for Divorces in 2019 and thereafter |
|
|
For every $1,000 Jack pays Sally. |
For every $1,000 Sally receives from Jack. |
|
Jack is required to pay the tax of $320. |
Sally does not have to pay taxes on this income. |
|
Net alimony cost to Jack is $1,320 |
Net alimony benefit to Sally is $1,000. |
Net benefit to the IRS = $320 |
|
As you can see, the IRS gets more tax dollars under Scenario 2, which means Jack either pays more or Sally gets less.
NOTE: The above information is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
Other Important Provisions
The following rules will also have a substantial effect on individual filers come tax time:
- The 529 College Savings Plan will continue to be withdrawn tax-free if used for higher education expenses. However, now taxpayers are allowed up to $10,000 per year to be used for elementary or high school education tuition at private and religious schools. This modification does not expire.
- Like-kind exchanges are limited to real property not available for sale, meaning tangible property, such as vehicles, are no longer eligible for the like-kind exchange provision.
- A new inflation measure, the Chained Consumer Price Index for All Urban Consumers, will be the indicator for any tax bracket adjustments. The goal of this particular provision is to result in a slower cost of living adjustment each year.
One final reminder
Most of the provisions outlined in the TCJA, including the standard deduction, are slated to sunset in 2025. It’s always in your best interest to work with a credentialed tax professional. Email Rea & Associates for help identifying a long-term tax-saving solution that work’s for you.
By Cindy Kula, CPA, PFS, CFP (retired) and Dave McCarthy, CPA, CSEP (retired)
Check out these articles for more information about the Tax Cuts and Jobs Act:
Tax Cuts and Jobs Act Creates a Great Opportunity to Gift Your Business
What Individuals Need To Know About Filing 2018 Tax Returns & Trump’s Tax Reform Initiative