On December 20, 2017, the U. S. House and Senate passed the Tax Cuts and Jobs Act (TCJA). This is the largest major tax reform in over three decades and contains a whole host of tax provisions that impact individuals and businesses. With a few rare exceptions, the TCJA affects 2018 returns, filed in 2019. Below are highlighted some of the provisions that will affect individuals.
New Tax Rates and Brackets. For the years 2018-2025 seven tax brackets apply for individuals. These range from 10% to 37% and this new law changes (primarily increases) the income levels that fall into each bracket.
Personal Exemption Deduction was Eliminated. Under pre-TCJA law, the deduction for each personal exemption was $4,150, subject to a phase-out for higher earners. For tax years 2018-2025, the deduction for personal exemptions is eliminated.
Standard Deduction Increased. Under pre-TCJA law the standard deduction amounts were $6,500 for singles and $13,000 for married filing jointly payers. For tax years 2018-2025, the standard deduction is increased to $24,000 for married filing jointly payers and $12,000 for singles plus the current law additional standard deduction for the elderly and blind.
State and Local Tax Deduction Limited. For tax years 2018-2025, a taxpayer’s itemized deduction for State and local taxes is limited to $10,000 of the aggregate of (1) state and local property taxes and (2) state and local income taxes paid in the tax year.
Miscellaneous Itemized Deductions Eliminated.
New Deductions for Business Income from Pass-through Entities and Sole Proprietorships. For tax years 2018-2025, an individual generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship income.
Child Tax Credit Increased. For the tax years 2018-2025, the child tax credit is increased from $1,000 to $2,000 per qualifying child under the age of 17, subject to changes in the phase-outs and refundability provisions.
Affordable Care Act Individual Mandate Repealed.
Recharacterization of Roth Conversions Eliminated.
Estate and Gift Tax Retained with Increased Exemption Amount. For estates of decedents dying and gifts made after 2017 and before 2026, the TCJA doubles the base estate and gift tax exemption amount from $5 million to $10 million and is indexed for inflation.
The major economic benefit of the TCJA, in my opinion, is the reduction of the corporate tax rate from 35% to a flat 21% for years beginning 12/31/2017. This serves to decrease income tax expenses for corporations by as much as 40%. This will serve to provide net income to fund additional employment, plant and equipment expansion, increases in salaries and benefits, etc.
This is a very broad overview of some of the changes that are coming. There are many more that may affect tax payers in different ways. Please review your individual situation with your tax advisor.
Jimmy B. Coffman, CFP®, CPA, CFA
Jimmy is one of the longest tenured team members at Austin Asset, a fee-only financial planning firm. He is an expert at helping clients prioritize and find a balance in their wealth planning strategy. For over 40 years, he has worked with individuals and businesses, guiding them in their financial and investment needs.