Tax reform and Impact for Individuals

The tax reform bill, officially known as the Tax Cuts & Jobs Act was passed by Congress and signed into law in December 2017. Most provisions take effect for tax years beginning 2018. The following is an overview of many of the provisions in the bill affecting individual taxpayers.

Tax Rates
The tax rates for all income brackets have been reduced. The focus has been on the top rate being reduced from 39.6% to 37% however the tax rates for all tax brackets have been reduced. For example, the 15% bracket is now 12% and the 28% bracket is now 24%. Therefore regardless of your income level, your marginal tax rate should be lower.

Standard Deduction
The standard deduction has been doubled. The deduction is $24,000 for Married Filing Joint, $18,000 for Head of Household and $12,000 for all others. In prior years, approximately 105 million taxpayers or 70% of all filers claimed the standard deduction. Therefore for most taxpayers this increased standard deduction will result in significant tax savings and simply the tax filing process for many more.

Personal Exemption & Child Tax Credit
The personal exemption has been eliminated however the child tax credit has been increased. The tax credit has been increased to $2,000 per qualifying child and the maximum refundable portion has been increased to $1,400. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Mortgage Interest
The home mortgage interest deduction was modified to reduce the limit on acquisition debt to $750,000. The prior law limit was $1,000,000. Mortgage debt on the acquisition of a principal residence prior to 2018 will be allowed the prior law $1 million limit. Interest on home equity loans has been repealed.

State and Local Taxes
Individuals are allowed to deduct up to $10,000 ($5,000 for married filing separate) in state and local income or property taxes.

Miscellaneous Itemized Deductions
All miscellaneous itemized deductions subject to the 2% of AGI limit are repealed.

Medical Expenses
For 2017 & 2018, the threshold for deducting medical expenses was reduced from 10% to 7.5% of AGI. Therefore more taxpayers will be able to claim medical expenses in these years.

Pass-through Income Deduction
There is no tax simplification here. This is complicated and in order to understand it, you first need to know some definitions:

  1. Qualified Business Income (QBI). QBI is generally net income from your sole proprietorship, partnership or S corporation.

  2. Qualified Property. Qualified property is tangible property subject to depreciation used in your business at the end of the tax year.

  3. Specified Service Trade or Business. A specified service trade or business is any business involving the performance of services in the fields of accounting, health, law, consulting, financial services, athletics, or any business where the principal asset is the reputation or skill of one or more employees or owners.
  4. Threshold amount. The threshold amount is the amount above which both the limit on specified business and the wage limit apply. The threshold amount is $157,500 for individual taxpayers and $315,000 for taxpayers filing jointly. Phase-ins apply which means that the benefit decreases as the income increases.

If your taxable income is below the threshold, the deductible amount for each of your business is simply 20% of your QBI with respect to each business.

If your taxable income is above the threshold, you are subject to limitations which are determined by your occupation and a wage & capital limit.

  1. If your occupation involves a specified service trade or business, your deduction phases out as your income exceeds the threshold amount

  2. For all other businesses, the wage and capital limits will apply which may result in a reduced deduction.

Further explanations of the pass-through provisions are beyond the scope of this article.  The tax bill also contains many other provisions not discussed in this article.  If you have questions or want to learn more please contact our office for a consultation.