The 16 Tax Reform Provisions Affecting Individuals
Tax Reform Overview for Individuals
The Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017, and is effective beginning in 2018. It is a major legislative overhaul of the U.S. tax code. This article contains a look at some of the more important elements of the new law that have an impact on individuals. For recent announcements and updates, check the IRS “Tax Reform” web page.
Tax Reform Provisions for Individuals
The TCJA will affect the majority of U.S. taxpayers. Many individuals who previously itemized deductions on Schedule A may simply use the increased standard deduction under the new law. The following 16 changes are effective for tax years beginning in 2018 through 2025, unless otherwise noted.
- Reduction of Top Tax Rate: The new tax law has seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly.
- Increased Standard Deduction. The standard deduction is increased under the new tax law to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. The increases in the standard deduction mean that many individuals will no longer itemize deductions.
- Suspended Personal Exemptions. While the standard deduction has nearly doubled, the deduction for personal exemptions has been removed. The personal exemption in 2017 was $4,050 each.
- New Deduction for Qualified Business Income, or “QBI.” Beginning in 2018, certain taxpayers running a business will be allowed a deduction equal to 20 percent of “qualified business income,” or “QBI,” also referred to as “pass-through” income under Section 199A. QBI is income from partnerships, S corporations, LLCs, and sole proprietorships. Not all business owners, however, are treated equally under the new law. Service businesses (including attorneys, accountants, doctors and financial advisors) are not entitled to the full benefit of the 20 percent deduction if the business owner’s taxable income exceeds certain threshold amounts.
- Increased Child Tax Credit. Tax credits reduce your overall tax liability dollar-for-dollar. The new law increases the credit for qualifying children to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. A qualifying child is under 17 years old at the end of the tax year. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children (i.e., there is no age limit for the $500 credit). The AGI phaseouts are much higher, increased to $200,000 and $400,000 for joint filers. The higher phaseouts allow more taxpayers to take advantage of the child tax credit.
- Increased Medical Expenses. The new law allows for more medical expenses to be deducted. It reinstates the 7.5% floor for deducting medical expenses. Previously, medical expenses must have exceeded 10% of adjusted gross income for most taxpayers to be deductible.
- State and Local Taxes Limitation. There is a $10,000 limitation on the itemized deduction for state and local income and property taxes in 2018.
- Mortgage Interest Deduction Reduced. The new law reduces the dollar limit on mortgages qualifying for the home mortgage interest deduction to $750,000 of qualified residence loans ($375,000 for a married taxpayer filing a separate return). These figures are a reduction from the prior limits of $1,000,000 ($500,000 for a married taxpayer filing a separate return). The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
- Miscellaneous Itemized Deductions Removed. Miscellaneous itemized deductions” are no longer allowed as a deduction. These include tax return prep costs, investment expenses, union fees, and unreimbursed employee expenses.
- Casualty and Theft Losses Removed. Personal casualty and theft losses are non-deductible under the new law, unless if attributable to a federally declared disaster.
- 3% Limitation on Itemized Deductions Removed. The prior 3% phaseout of certain itemized deductions has been removed. This deduction applied to taxpayers whose adjusted gross income exceeded specified thresholds.
- Moving Expense Deduction Removed. The new law removed the job-related moving expense deduction and reimbursements, except for certain military personnel.
- Alimony Reporting Changes. For divorce decrees and separation agreements entered into after 12/31/2018, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
- Health Care Individual Mandate Penalty Removed. The new law removed the individual mandate starting in 2019. The individual mandate required all Americans to acquire health insurance coverage or risk paying a penalty.
- Estate and Gift Tax Exemption. Under this law, the basic exclusion amount for an estate tax return for a 2018 date of death increases to $10,000,000, before taking into account the necessary inflation adjustment. See Estate and Gift Tax for more information.
- AMT Exemption. The AMT, or Alternative Minimum Tax, has been retained for individuals, but the new law raises the exemption and phaseout levels from 2018 through 2015.
As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your particular situation, contact Porter Law Office, LLC today.
Contact an Experienced Ohio Tax Attorney
Columbus, Ohio Tax Lawyer
If you have tax questions, contact the experienced tax lawyer at Porter Law Office, LLC. For any other IRS or state of Ohio tax controversy, contact the experienced Columbus, Ohio tax attorney at Porter Law Office, LLC today for a consultation to discuss your particular IRS tax needs and options.