The Tax Cuts and Jobs Act (H.R. 1, “TCJA”) has been enacted into law. The bill contains many provisions affecting both individuals and businesses. The main provisions affecting individuals are summarized below. Except where noted otherwise below, all of these provisions take effect on January 1, 2018. Thus, they do not affect your 2017 taxes. Except where otherwise noted, all of these changes are scheduled to expire on January 1, 2026, unless they are extended by Congress.
The TCJA keeps seven tax brackets with the lowest 10% bracket remaining the same. Other income tax rates are reduced. There is a new 12% tax rate that covers more income than the 2017 10% and 15% brackets, resulting in lower taxes for many middle-income households. At the highest end of the spectrum, married taxpayers with incomes over $600,000, and singles with incomes over $500,000, pay tax at much lower rates—37% instead of 39.6% in 2017.
The standard deduction, which reduces all individual taxpayers’ taxable income by a fixed amount, is roughly doubled to $12,000 for single individuals and $24,000 for marrieds filing jointly. Individuals whose taxable income is less than these amounts will pay zero income tax.
The $4,050 per-household-member personal exemption is eliminated. Because of this, larger families may benefit little from the increase in the standard deduction.
The new tax law eliminates itemized deductions for:
Charitable contributions remain deductible by itemizers. People who itemize will be allowed to deduct cash contributions up to 60% of their adjusted gross income, instead of 50% under current law.
In addition, fewer taxpayers will itemize their personal deductions because of the increase in the standard deduction.
Under the TCJA, the AGI threshold for deducting medical expenses is reduced from 10% to 7.5% for 2017 through 2019. This is one of the few provisions of the TCJA that applies retroactively to 2017. The threshold is scheduled to go back to 10% of AGI starting in 2020.
The TCJA limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness, a reduction of $250,000 from prior law. The new limit goes into effect January 1, 2018 and applies only to homes purchased after December 15, 2017. Taxpayers with a binding written contract in place before December 15, 2017 who purchase a home before April 1, 2018, can continue to deduct up to $1 million in acquisition debt.
Interest on home equity loans is no longer deductible. This applies to loans made before 2018 as well as to those taken out later.
The TCJA limits the state and local tax deduction to a total of $10,000. Under prior law, individuals who itemized were allowed to deduct the full amount of property tax and state and other local taxes they paid each year, including state income and sales tax.
The child tax credit is increased to $2,000 per child under 17, up from $1,000 per child. $1,400 of the credit is refundable, meaning you need owe no tax to receive the credit amount. The TCJA increases the phase out to over $200,000 for individual taxpayer income (up from $75,000) and over $400,000 income for marrieds (up from $110,000).
The plan also establishes a new $500 credit for each parent and nonchild dependent, such as college students.
The TCJA increases the amount of income exempt from the Alternative Minimum Tax by 39%. As a result, fewer taxpayers will be subject to the AMT.
Under the TCJA, estates worth up $11 million per person are exempt from the federal estate tax, double the prior amount. This means that married couples with estates worth up to $22 million will not be affected by the federal estate tax.
Under prior law, alimony could be deducted by the ex-spouse who paid it. The TCJA eliminates this deduction. However, ex-spouses who receive alimony will no longer be required to pay income tax on the payments.
The Affordable Care Act (popularly called Obamacare) required individuals to obtain minimally adequate health insurance for themselves and their dependents. Those that failed to comply had to pay a tax penalty to the IRS. The TCJA permanently eliminates this penalty starting 2019, effectively making individual compliance with Obamacare purely voluntary. However, the penalty remains in effect for 2018.
Effective date: January 1, 2018