2018 Summary of Changes to Income Tax for Individuals
The Tax Cuts and Jobs Act of 2017 (Tax Act) reduces the effective income tax rate for many taxpayers and sharply curtails the application of the alternative minimum tax (AMT). It also limits many deductions, including the mortgage interest deduction and the deductions for state and local income taxes, property taxes, and sales taxes, as well as the deduction for tax preparation expenses. The newly created Internal Revenue Code Section 199A introduces a deduction that applies to certain types of business income. There are aspects of this Section that are relevant to corporations and pass-through entities and others that are relevant to individuals. The following provides a summary of the changes to the income tax rules for individuals:
Individual Income Tax Rates: There are now seven income tax brackets for individuals (the rates for these brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%). These tax rates are effective for tax years beginning after December 31, 2017, and before January 1, 2026.
Individual Standard Tax Deductions: The individual standard deductions effective for tax years beginning after December 31, 2017, and before January 1, 2026, have increased: $24,000 for married taxpayers; $18,000 for head of household; and $12,000 for single taxpayers (indexed for inflation). Personal exemptions for tax years beginning after December 31, 2017, and before January 1, 2026, are suspended.
Alternative Minimum Tax Exemptions: The AMT for individuals remains in place, however the exemption amounts, subject to phase-out, are increased as follows:
- $109,400 for married taxpayers filing jointly or for surviving spouses;
- $70,300 for single taxpayers; and
- $54,700 for married taxpayers filing separately.
Net Investment Income: The provisions governing the application of net investment income are unchanged.
Child Tax Credit: An increased child tax credit of $2,000 per child under age 17 is available for tax years beginning after December 31, 2017, and before January 1, 2026. The Tax Act also provides a $500 credit for dependents other than qualifying children. Both credits are phased out at certain income levels.
Property Capital Gains: Taxpayers may continue to exclude from gross income up to $500,000 for married taxpayers and $250,000 for individual taxpayers from the sale of a principal residence, provided the taxpayer(s) meet certain criteria.
Charitable Contributions: Taxpayers may now deduct charitable contributions of cash to public charities and certain other organizations up to 60% of adjusted gross income (AGI) (increased from 50%). Excess deductions may be carried over for five years.
Mortgage Interest Deduction: The requirements for the mortgage interest deduction are also modified. The deduction of interest on “acquisition indebtedness” is retained, but the debt limit for deductibility is reduced to $750,000. The deduction of interest on “home equity indebtedness” is suspended entirely.
Deductions for Other Taxes: The state and local sales, property, and income tax deduction is limited to $10,000 in total.
Medical Expense Deduction: The medical expense deduction floor is lowered to 7.5% of AGI for all taxpayers for tax years 2017 and 2018.
Alimony Payments: The treatment of alimony payments will change substantially at the end of 2018. For agreements entered into after December 31, 2018, the payor spouse will no longer be able to deduct alimony payments, and the payee spouse will not include receipt of alimony payments in income.
Miscellaneous Deductions: Other income tax deductions have also been limited in scope or eliminated entirely, including the suspension of all miscellaneous itemized deductions that are subject to the 2% floor under present law.
ACA Individual Mandate: The individual mandate under the Affordable Care Act (i.e., ACA or Obamacare) is permanently repealed effective for months beginning after December 31, 2018.
While there was much discussion regarding the possible requirement that those with multiple blocks of securities with differing tax cost bases would be required to use the so-called “FIFO” (first in, first out) method of allocating those blocks when selling or otherwise disposing of such stock, that rule is not included in the final bill.