Heres some some of the changes that most people want to know.
Tax Brackets to Change
For tax years beginning January 1, 2018, and before January 1, 2026 the tax brackets will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The 39.6% bracket is suspended. In 2018, the 37% bracket will start at adjusted gross incomes of $500k for single taxpayers, and $600k for taxpayers who file a joint return.
Who is affected: Everyone
What it means: Most taxpayers will see no meaningful changes here, though withholding and final tax paid will be somewhat lower. However, high earning households will benefit from the lower top tax bracket.
Obamacare Shared Responsibility Penalty Eliminated
The penalty assessed on taxpayers who did not maintain minimum essential healthcare coverage during every month of the tax year is eliminated for tax years after 2018.
Who is affected: Taxpayers without health insurance
What it means: Under the Trump Administration, the IRS effectively stopped enforcing the individual mandate to maintain health coverage by allowing taxpayers to decline to report coverage status. This provision of the Act removes the penalty altogether, but does not go into effect until January 1, 2019. The Net Investment Income Tax, and the additional Medicare Tax on earned income remain in place.
Standard Deduction Increased & Personal Exemptions Suspended
For tax years beginning January 1, 2018, the standard deduction will be $24k for taxpayers who file a joint return, $18k for head of household filers, and $12k for single taxpayers. Personal exemptions will no longer be allowed.
Who is affected: Everyone
What it means: The new standard deduction is slightly more than the combined standard deduction and personal exemption amounts for 2017. Taxpayers who don’t itemize their deductions, and who have no dependents, will see a small change in tax. In a slightly different scenario, if you don’t have enough deductions to itemize, and have many dependents, this may hurt you. Also, you will likely see a change in withholding sometime in the first quarter, but after January, as companies react to the new law. This will likely require submission of a new W-4 form.
State and Local Tax Deduction Limited
For tax years beginning January 1, 2018, and before January 1, 2026, the itemized deduction for state and local income taxes is capped at $10k per return.
Who is affected: Taxpayers who live in high tax states
What it means: With the increase in the standard deduction, fewer taxpayers will itemize deductions beginning in 2018. However, those who still itemize, and also live in very high tax states (such as California and New York), may lose part of the benefit associated with the pre-2018 deduction. Taxes paid in connection with a trade or business activity remain fully deductible as business expenses. In addition, and effective immediately, the law treats taxes as paid as of the last day of the year when due, so a prepayment of 2018 tax in 2017 will not generate a deduction for 2017.
Home Mortgage Interest Deduction Limited
For tax years beginning January 1, 2018, and before January 1, 2026, the cap on deductible interest associated with mortgage debt is reduced from $1MM to $750k ($375k for married taxpayers filing separate returns).
Who is affected: People with large mortgage loans
What it means: This measure will not affect taxpayers with mortgages of less than $750k. However, taxpayers who live in high tax, high cost of living states, may suffer double damage as both the state and local tax, and the mortgage deductions are capped in future years. The Act doesn’t seem to address the loophole created by Sophy v. Commissioner in 2016, which established that unmarried co-owners of real property may each claim the full mortgage interest deduction for a single person for his or her half of indebtedness. Effectively, this means that the limit for the deduction will be $1.5MM for unmarried co-owners in 2018 and later.
Child Tax Credit Increased
For tax years beginning January 1, 2018, and before January 1, 2026, the Child Tax Credit is increased to $2,000 for married taxpayers earning up to $400k, and single taxpayers earning up to $200k. The credit is refundable up to $1,400 per child in 2018, and indexed to inflation in future years.
Who is affected: Taxpayers with dependent children
What it means: The Child Tax Credit will be available to more taxpayers. Unlike a deduction, a credit is a dollar for dollar reduction in tax due. Even when no tax is due, this credit is partially refundable to the taxpayer, provided he or she has earned income during the year.
Moving Expense Deduction and Reimbursement Exclusion Suspended
For tax years beginning January 1, 2018, and before January 1, 2026, the deduction for qualified moving expenses, and the exclusion from income of employer reimbursements of such expenses, are suspended.
Who is affected: Taxpayers who expect to move for employment purposes after 2017.
What it means: Qualified moving expenses were a deduction for adjusted gross income (“above the line”) for 2017 and prior years, and employer reimbursements were excludible from income to the extent they were offset by expenses. These items will now be considered personal income and items of expense. This suspension does not apply to members of the Armed Forces.
Personal Casualty & Theft Losses Suspended
For tax years beginning January 1, 2018, and before January 1, 2026, the deduction for personal theft and casualty losses will no longer be allowed, except for losses sustained in a federally declared disaster.
Who is affected: Taxpayers with non-business theft losses, such as those sustained due to participation in a Ponzi scheme, and taxpayers who suffer casualties outside a disaster area, such as uninsured damage to, or destruction of, a home.
What it means: This deduction isn’t common, outside the context of a major disaster. Suspension of the deduction means that otherwise qualifying losses cannot be treated as ordinary, but capital loss treatment may still be available for some losses (such as Ponzi losses).
Long term capital gains: The Act retains the tiered rate schedule for long term capital gains (short term capital gains are taxed at the ordinary income rate), but ties the top 20% rate to adjusted gross income of $479k for joint filers, $452k for heads of household, and $426k for single taxpayers, and indexes these break points for inflation in future years. Note that the top marginal tax rate and long-term capital gains rate are no longer tied together at the same level of income as they are under pre-2018 law.
Charitable contribution deduction limitation increased: The Act increases the cap on the deduction for most charitable contributions to 60% (from 50%) of adjusted gross income in the year of the deduction. Non-deductible contributions can be carried forward up to five years.
Medical expense deduction threshold reduced: For tax years 2016 through 2018, medical expenses will be deductible (as an itemized deduction) to the extent that they exceed 7.5% of adjusted gross income. Note that this measure is RETROACTIVE to January 1, 2017, and expires after 2018.
529 accounts expanded: After 2017, distributions from 529 accounts of up to $10k per year may be used to fund elementary or secondary public, private, or religious school tuition (in addition to higher education expenses allowable under current law).
Miscellaneous itemized deductions suspended: These include the deduction for tax preparation expenses, unreimbursed employee or partner business expenses, professional dues, clothing and tools used in employment, and a host of others. These deductions have always been limited to the extent they exceed 2.5% of adjusted gross income, and then became itemized deductions
AMT exemption amounts increased: In 2018, the exemption from the Alternative Minimum Tax increases to $109k for joint returns, $70k for single taxpayers, and $55k for taxpayers who file married/separate returns. These amounts will be adjusted annually for inflation.
New election to defer income from certain grants of restricted stock units: Similar to the existing 83(b) election, the new 83(i) election will permit employees to postpone income recognition associated with certain grants of restricted stock for up to five years after the vesting date. This differs from the 83(b) election in that the trigger for income recognition is the earliest of five statutory events (with the five year period being the latest of the five), rather than only time based vesting. The election also requires employers to defer deduction of the cost of the stock until the employee recognizes it for tax purposes.
Carried interest: The holding period for income associated with personal services provided to certain partnership interests to be treated as long term capital gains increases from one year to three years. Thus, hedge fund management remains a lucrative profession, just with a slightly longer holding period requirement.