Individual Provisions of The Tax Cuts and Jobs Act
The following summarizes the key provisions of the Tax Cuts and Jobs Act (the Act) as it relates to individual taxpayers. It should be noted that most of the provisions affecting individuals will expire starting in 2026.
Tax Brackets. While one of the initial goals of tax reform was the simplification of tax rates, there are now seven tax brackets instead of six.
Personal Exemptions and Standard Deduction. Personal exemptions have been “suspended” until taxable years beginning after December 31, 2025. The standard deduction has been “temporarily” increased to $12,000 for individual filers and $24,000 for married taxpayers filing jointly. The increased amount of the standard deduction expires for taxable years beginning after December 31, 2025.
Individual Alternative Minimum Tax (“AMT”). For taxable years beginning after December 31, 2017, and before January 1, 2026, the AMT exemption is increased to $109,400 for married taxpayers filing jointly or half that amount for married individuals filing separately and $70,300 for all others (other than estates and trusts). The phase-out thresholds are increased to $1,000,000 for married individuals filing jointly and $500,000 for all other taxpayers.
Child Tax Credits. The child tax credit has been increased from $1,000 to $2,000 per qualifying child. Only $1,400 per child is refundable. Children age 17 and older are not eligible.
Earned Income Credit, Lifetime Learning Credit, American Opportunity Credit, Deduction for Qualified Tuition and Related Expenses. No changes have been made to existing law.
Education Related Provisions. These provisions include the following:
Deduction for Taxes Not Paid or Accrued in a Trade or Business. Subject to the exception below, in the case of an individual, state, local and foreign property taxes and local sales taxes are deductible only when paid or accrued in carrying on a trade or business or in connection with an activity for the production of income (i.e., deductible in computing income on Form 1040 Schedules C, E or F). An individual can deduct such property taxes if they are imposed on business assets, such as residential rental property. Similarly, in the case of an individual, state and local income taxes are not deductible, subject to the exception.
The deductions for state and local property taxes (not paid or accrued in carrying on a trade or business or in connection with an activity for the production of income) and state and local income taxes (or sales taxes in lieu of income taxes) have been combined into a single deduction and limited to $10,000 in the aggregate ($5,000 for a married taxpayer filing separately). Foreign real property taxes are not deductible under this exception.
These rules apply to taxable years beginning after December 31, 2017, and before January 1, 2026.
The conference agreement provides that prepayments for anticipated 2018 state and local income taxes made in 2017 are to be treated as made on December 31, 2018, and, therefore, are not allowed as deductions on a 2017 return.
Home Mortgage Interest. The deductibility of interest on current mortgages of up to $1,000,000 ($500,000 in the case of married taxpayers filing separately) of principal indebtedness remains. However, in general, for new mortgages entered into between December 15, 2017, and December 31, 2025, this limit is reduced to $750,000 ($375,000 for married taxpayers filing separately). For taxable years beginning after December 31, 2025, the limit reverts to $1,000,000 ($500,000 for married taxpayers filing separately), regardless of when the indebtedness was incurred. The deduction for home equity interest is suspended, effective for taxable years beginning after December 31, 2017, and before January 1, 2026.
Charitable Contributions. The income-based percentage limit for certain charitable contributions by an individual taxpayer of cash to public charities and certain organizations is increased from 50% to 60% of adjusted gross income, effective for charitable contributions made in taxable years beginning after December 31, 2017 and before January 1, 2026.
Medical Expenses. There is a temporary reduction in the medical expense deduction floor to include costs that exceed 7.5% of adjusted gross income (rather than the 10% under current law). This applies for taxable years beginning after December 31, 2016, and before January 1, 2019.
Alimony Payments. The deduction for alimony is repealed (as well as the inclusion in income of alimony received). This provision is effective for any divorce or separation instrument executed after December 31, 2018, subject to rules governing modifications.
Moving Expenses. Subject to a limited exception, this deduction is suspended, effective for taxable years beginning after December 31, 2017, and before January 1, 2026. The exclusion from gross income and wages for qualified moving expense reimbursement (except for certain Armed Forces-related moving expenses and reimbursement) is also suspended, for taxable years beginning after December 31, 2017, and before January 1, 2026.
Personal Casualty and Theft Losses. Effective for losses in taxable years beginning after December 31, 2017, and before January 1, 2026, this deduction is repealed except for losses incurred as a result of certain federally declared disasters. Also, special relief rules apply with respect to 2016 major disasters, as to personal casualty losses and the use of retirement funds.
Miscellaneous Itemized Deductions Subject to 2% Floor. All miscellaneous itemized deductions subject to the 2% floor under current law are repealed, for taxable years beginning after December 31, 2017, and before January 1, 2026.
Limitation on Itemized Deduction (3% Limitation). The 3% limitation is repealed, for taxable years beginning after December 31, 2017, and before January 1, 2026.
Affordable Care Act Individual Shared Responsibility Payment. Under the terms of the Affordable Care Act, individuals must be covered by a health plan that provides at least a specified minimum coverage or be subject to a tax (penalty) for failure to maintain the coverage (often referred to as the “individual mandate”), subject to certain exemptions. The requirement for this payment is eliminated, i.e., would reduce the amount of the shared responsibility payment to zero. This applies to health care coverage status for months beginning after December 31, 2018.
Estate and Gift Tax Exemption. The estate and gift tax exemption is doubled, accomplished by increasing the basic exclusion amount from $5 to $10 million. The $10 million exclusion amount is indexed for inflation after 2011 ($10.98 million for 2017). The proposal is effective for decedents dying, generation-skipping transfers and gifts made after December 31, 2017. The increase in the basic exclusion amount expires for decedents dying and gifts made after December 31, 2025.