The Tax Cut and Jobs Act is
here. This new tax law includes many expected changes, and some surprises
as well. Here are a few of the most important things that individual
taxpayers should know:
1. New individual tax rates and brackets For 2018 through 2025, the new law keeps seven tax brackets, but six are at lower rates. In 2026, the current-law rates and brackets would return. The temporary rate brackets under the new law are as follows.
Single Joint Head
tax bracket $0
- $9,525 $0
- $19,050 $0
of 12% bracket $9,526 $19,051 $13,601
of 22% bracket $38,701 $77,401 $51,801
of 24% bracket $82,501 $165,001 $82,501
of 32% bracket $157,501 $315,001 $157,501
of 35% bracket $200,001 $400,001 $200,001
of 37% bracket $500,001 $600,001 $500,001
2. No change in taxes on long-term capital gains and
new law retains the existing 0%, 15% and 20% tax rates on long-term
capital gains and dividends. For 2018, the rate brackets are as
Single Joint Head
tax bracket $0
- $38,599 $0
- $77,199 $0
of 15% bracket $38,600 $77,200 $51,700
of 20% bracket $425,800 $479,000 $452,400
3. No mandatory FIFO stock basis rule
next year, the Senate version of the tax reform bill would have
forced you to use the first-in-first-out (FIFO) method to calculate
the tax basis of shares that you sell from taxable accounts. If the
price of the shares stair-stepped higher as you bought them, having
to use the FIFO method would have meant that your taxable gain
would be figured by treating the oldest and cheapest shares as
being sold first. That would maximize your gain and maximize the
resulting tax hit. Fortunately, this proposed change didn’t make
the cut, so it’s business as usual.
4. Higher standard deductions, but no more personal
and dependent exemption deductions
new law almost doubles the standard deduction amounts, starting in
2018. However, personal and dependent exemption deductions, which
would have been $4,150 each for 2018, are eliminated. The
2018 standard deduction amounts are as follows.
$12,000 for singles (up from $6,350 for 2017)
$24,000 for joint-filing married couples (up from $12,700)
$18,000 for heads of households (up from $9,350)
standard deduction amounts for the elderly and blind are still allowed.
5. New limits on deductions for state and local
2018, the new law limits your deduction for state and local income
and property taxes to a combined total of $10,000 ($5,000 if you
use married filing separate status). Foreign real property taxes
can no longer be deducted, but you can still choose to deduct state
and local sales taxes instead of state and local income taxes.
6. New limits on home mortgage interest deductions
next year, the new law reduces the maximum amount of mortgage debt
to acquire a first or second residence for which you can claim
itemized interest expense deductions from $1 million (or $500,000
if you use married filing separate status) to $750,000 (or $375,000
if you use married filing separate status). However, this change
doesn’t affect home acquisition mortgages taken out under binding
contracts in effect before Dec. 16, 2017 as long as the home
purchase closes before April 1, 2018.
the old-law $1 million/$500,000 limits continue to apply to home
acquisition mortgages that were taken out under the old-law rules
and are then refinanced after this year (as long as the refinanced
loan principal doesn’t exceed the old loan balance at the time of
the refinancing). Starting next year, the new law also eliminates
the old-law rule that allowed interest deductions on up to $100,000
of home-equity loan balances.
7. No change in home sale gain exclusion rules
new law preserves the valuable break that allows you to potentially
exclude from federal income taxation up to $250,000 of gain from a
qualified home sale, or $500,000 if you are a married joint-filer.
The earlier House and Senate bills both included restrictions on
this break, but none of the proposed changes made the cut. So it’s
business as usual and the "2 out of 5" rule
8. Expanded medical expense deduction for 2017 and
new law preserves the deduction and actually expands it to cover
medical expenses in excess of 7.5% of adjusted gross income (AGI)
for 2017 and 2018 (the old-law deduction threshold for 2017 was 10%
9. Education tax breaks preserved
new law leaves existing education-related tax breaks in place.
10. IRA to Roth Conversions Starting next year, you will not be able to reverse the conversion
of a traditional IRA into a Roth account. Under the old-law rules,
you had until October 15 of the year after an ill-advised
conversion to reverse it and avoid the conversion tax hit. At this
point, it is not clear if this change would prevent you from
reversing a 2017 conversion by 10/15/18 or it would only
prevent you from reversing a conversion done in 2018 and beyond. So
if you have a 2017 conversion that you already know you want to
reverse, get it reversed before year-end to be on the safe side.
11. Alternative Minimum Tax (AMT) Unfortunately, the new law retains the individual alternative
minimum tax (AMT), but the AMT exemption deductions are
significantly increased and phased out at much higher income level,
starting next year. For many folks AMT exposure was caused by high
itemized deductions for state and local income and property taxes
and lots of personal and dependent exemption deductions. Those
breaks were disallowed under the AMT rules. With the new limits in
deductions for state and local taxes, the elimination of personal
and dependent exemption deductions, and larger AMT exemption
deductions, many previous victims of the AMT will find themselves
off the hook, starting next year.
12. Child Tax Credit Starting next year, the maximum child credit is increased to $2,000
per qualifying child, and up to $1,400 can be refundable (meaning
you can collect it even if you don’t owe any federal income tax).
In addition, a new $500 nonrefundable credit is allowed for
qualified non-child dependents.
13. Moving Expenses Starting next year, deductions for moving expenses and most
miscellaneous itemized expenses are eliminated.
Starting next year, itemized deductions for personal casualty and
theft losses are eliminated, except for personal casualty losses
incurred in a federally-declared disaster.
14. Alimony Starting in 2019, you will no longer be able to deduct alimony
payments if they are required by a divorce agreement entered into
after 12/31/18. Recipients of nondeductible payments won’t have to
include them in taxable income.
15. Plug-in Vehicles Tax breaks for adoption expenses are preserved.
The tax credit for qualified plug-in electric vehicles is
16. Unified Gift and Estate Tax Exemption Starting next year, the unified federal gift and estate tax
exemption will basically double — to about $11.2 million or $22.4
million for a married couple.
17. The Annual Gift Tax Exclusion for 2018 is $15,000
These are just a few highlights of the new tax laws for individual
taxpayer. As we enter into the 2017 Tax Season, for tax
planning purposes, we can estimate how these changes could effect
your individual tax return for 2018. Knowing what to
expect will help you make wise decisions going forward.
We're looking forward to a rewarding 2017 Tax Season for
everyone. Give us a call if you have any concerns regarding
your particular tax picture.
Nadine Lord Divan EA, CFP®
30021 Tomas, Suite 300
Rancho Santa Margarita CA 92688
Toll Free 800-350-1299