Tax Cuts and Jobs Act: A Post-Tax-Season Look at the Impact on Individuals

Apr 26, 2019

The Tax Cuts and Jobs Act (TCJA) became effective for most taxpayers for the year ended December 31, 2018. The TCJA fundamentally changed the individual and business tax landscape and its provisions are generally effective for tax years 2018 through 2025. Individual taxpayers who filed their tax returns by the April 2019 deadline were finally able to see and feel the effects of the changes.

New tax rates for individuals

Many taxpayers saw an impact as a result of the lower tax rates. Most of the seven existing marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) were replaced with new corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also established new marginal income tax brackets for estates and trusts, and replaces existing “kiddie tax” provisions (under which a child’s unearned income, over certain thresholds, is taxed at his or her parents’ tax rate) by effectively taxing a child’s unearned income using the estate and trust rates.

Standard deduction and personal exemptions
Existing standard deduction amounts were roughly doubled, but personal exemptions were repealed by the new legislation. New standard deduction amounts are now as high as $24,000 for married couples. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and remain available for those who qualify. Higher standard deduction amounts generally meant that fewer taxpayers itemized deductions.

Itemized deductions

Many taxpayers were surprised at the fact that certain deductions with which they had become familiar over the years were either limited or no longer available. Additionally, the overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) was repealed. Much of the time and effort spent to track and accumulate traditionally deductible itemized deductions ultimately resulted in no benefit for many taxpayers. The following changes were made to individual deductions:

• State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).

• Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the first $1 million limit, used to acquire or substantially improve your home, continues to apply. A deduction is no longer allowed for interest on home equity indebtedness and cannot be grandfathered in.

• Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns to 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT) for the two years as well.

• Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deducting certain cash gifts is increased from 50% to 60%. Deductions for non-cash contributions will retain the 50% limitation.

• Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.

• Miscellaneous itemized deductions — Miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses, investment fees and unreimbursed employee business expenses, are no longer deductible.

Child tax credit

The child tax credit was doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The maximum amount of the credit that may be refunded is $1,400 per qualifying child, and the earned income threshold for refundability falls from $3,000 to $2,500 (allowing those with lower earned incomes to receive more of the refundable credit). The income level at which the credit begins to phase out is significantly increased to $400,000 for married couples filing jointly and $200,000 for all other filers. The credit will not be allowed unless a Social Security number is provided for each qualifying child.

A new $500 nonrefundable credit is available for qualifying dependents who are not qualifying children under age 17.

Alternative minimum tax (AMT)

The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.

Other changes worth noting

• The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.

•Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in following years.

• In a permanent change that starts in 2018, Roth conversions cannot be reversed by re-characterizing the conversion as a traditional IRA contribution by the return due date.

• For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse, and are not included in the income of the recipient. This is also a permanent change.

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DISCLAIMER – This article is not intended to provide tax or legal advice. The information presented is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This information is provided for general information and educational purposes and may change at any time. Please contact RS Miller & Associates LLC for additional information.

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