NEW INCOME TAX RATES AND BRACKETS
For tax years beginning after December 31, 2017 and before January 1, 2026, seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
PERSONAL EXEMPTIONS SUSPENDED
The Tax Cuts and Jobs Act (TCJA) suspended the deduction for personal exemptions by reducing the exemption amount to zero. No changes are made to the additional standard deduction for the elderly and blind.
STANDARD DEDUCTION INCREASED
The TCJA increased the standard deduction to $24,000 for married taxpayers filing jointly, $18,000 for Head of Household filers, and $12,000 for taxpayers filing as Single or as Married Filing Separately.
CHANGES TO ITEMIZED DEDUCTIONS
The taxpayer’s overall itemized deductions are no longer limited because his or her adjusted gross income is over a certain limit. The deduction of state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if the filing status is Married Filing Separately). Job-related expenses or other miscellaneous itemized deductions that were subject to the 2%-of-adjusted gross-income floor can no longer be deducted.
BUSINESSES CAN IMMEDIATELY EXPENSE MORE UNDER THE NEW LAW
A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million, and increased the phase-out threshold from $2 million to $2.5 million. The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the certain improvements made to nonresidential real property after the date when the property was first placed in service.
QUALIFIED BUSINESS INCOME UNDER CODE SECTION 199A
The TCJA added Code Sec. 199A, “Qualified Business Income,” under which a non-corporate taxpayer including a trust or estate, who has qualified business income (QBI) from any trade or business including a partnership, S corporation, sole proprietorship, or farming (not W-2 wages) is allowed to deduct the lesser of the “combined qualified business income amount” of the taxpayer 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year Plus the lesser of 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year Taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
DEDUCTION FOR PERSONAL CASUALTY AND THEFT LOSSES SUSPENDED
In the past, individual taxpayers were allowed to claim an itemized deduction for uncompensated personal casualty losses, including those arising from fire, storm, shipwreck, or other casualty, or from theft The TCJA suspended the personal casualty and theft loss deduction, except for personal casualty losses incurred in a federally declared disaster.
Beginning in 2018, the deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended. Moving expenses are deductible on the federal return only if the taxpayer is a member of the armed forces on active duty and the move is due to a permanent change of station
CHILD TAX CREDIT INCREASED
Before the TCJA, a taxpayer could claim a child tax credit of up to $1,000 per qualifying child under the age of 17. The aggregate amount of the credit that could be claimed would be phased out by $50 for each $1,000 of AGI over $75,000 for single filers, $110,000 for married filers, and $55,000 for married individuals filing separately. For a child tax credit to be given, the child must have a valid Social Security Number. A child with Individual Taxpayer Identification Number (ITIN) does not qualify to have a Child Tax Credit. Now, under the TCJA, for tax years beginning after December 31, 2017, and before January 1, 2026, the Child Tax Credit has been increased to $2,000, and other changes were made to phase-outs and refundability during this same
Phase-out — The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers.
Non-qualifying child/dependent — A $500 nonrefundable credit is provided for certain non-qualifying children and other dependents.
Refundability — The amount of the credit that is refundable is increased to $1,400 for 2018 per qualifying child. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.
DEDUCTIONS FOR EMPLOYEE BUSINESS EXPENSES ELIMINATED
One of the biggest changes under this new law was the elimination of the deduction for unreimbursed employee business expenses beginning with 2018 tax returns. This effectively means that employees will no longer be able to offset their taxable income by common business expenses they may incur. (This change under the TCJA does not affect expenses individuals filing Schedule C or Schedule F are allowed to claim to offset their income subject to the self-employment tax and regular income tax.)
Form 2106, Employee Business Expenses, is now to be used only for certain categories of employee:
a)Qualified performing artists
b)Fee-Based state or local government officials
c)Armed forces reservists
d)Employees with impairment-related work expenses
Alimony received will no longer be included in income if a divorce or separation agreement is entered into after December 31, 2018. Alimony received will also no longer be included in income if a divorce or separation agreement was entered into on or before December 31, 2018, and the agreement is changed after December 31,2018, to expressly provide that alimony received is not included in the former spouse’s income. Alimony paid will no longer be deductible if a divorce or separation agreement is entered into after December 31,2018. Alimony paid will also no longer be deductible if a divorce or separation agreement was entered into on or before December 31, 2018, and the agreement is changed after December 31, 2018, to expressly provide that alimony received is not included in the former spouse's income
HOME EQUITY INTEREST
For tax years beginning after December 31, 2017, and before January 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for the filing status of Married Filing Separately). According to the IRS, despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit, or second mortgage, regardless of how the loan is labeled. The Tax Cuts and Jobs Act suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home, and meet other requirements.