The new tax year is a true game-changer for taxpayers and their advisers, as many fundamental, decades-old tax rules have been repealed or suspended, with many new ones going into effect. This article, the first of a series, highlights the tax changes that apply in 2018 to individuals – tax rates, deductions, and credits.
For more detail on these provisions, see Thomson Reuters Checkpoint Special Study: Highlights of the Tax Cuts and Jobs Act, which can be accessed on Checkpoint by clicking on the Table of Contents tab on the tool bar, and then following the link for “2017 Tax Reform.”
Revised income tax rates and tax brackets. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are four tax rates for estates and trusts: 10%, 24%, 35%, and 37%. (Code Sec. 1(i))
Boosted standard deduction. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the previously-existing additional standard deduction for the elderly and blind. (Code Sec. 63(c)(7))
Personal exemptions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is suspended—the exemption amount is reduced to zero. (Code Sec. 151(d))
Kiddie tax modified. For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. (Code Sec. 1(j)(4))
Floor beneath medical expense deduction lowered. For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, for all taxpayers, medical expenses may be claimed as an itemized deduction to the extent they cumulatively exceed 7.5% of adjusted gross income. (Code Sec. 213(f)) In addition, the rule limiting the medical expense deduction for AMT purposes to the excess of 10% of AGI doesn’t apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019. (Code Sec. 56(b)(1)(B))
State and local tax deduction limited. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, itemized deductions for an individual’s state or local taxes (as opposed to such taxes paid in connection with a Code Sec. 162 trade or business or in a Code Sec. 212 activity) are limited. The aggregate deduction for an individual’s state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes is limited to $10,000 ($5,000 for marrieds filing separately). The deduction for foreign real property taxes is completely eliminated unless paid or accrued in carrying on a trade or business or in an activity engaged in for profit. (Code Sec. 164(b)(6))
Crackdown on home mortgage and home equity interest. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity debt is suspended, and the deduction for home acquisition mortgage interest is limited to underlying debt of up to $750,000 ($375,000 for married taxpayers filing separately). (Code Sec. 163(h)(3)(F)) The new lower limit doesn’t apply to any acquisition debt incurred before Dec. 15, 2017. And, a taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who buys the residence before Apr. 1, 2018, is treated as incurring acquisition debt before Dec. 15, 2017.
Prior law’s $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence debt that was incurred before Dec. 15, 2017, so long as the debt resulting from the refinancing doesn’t exceed the amount of the refinanced debt. (Code Sec. 163(h)(3)(F))
Boosted charitable contribution deduction limit. For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%. (Code Sec. 170(b)(1)(G)) Contributions exceeding the 60% limitation generally may be carried forward and deducted for up to five years, subject to the later year’s ceiling.
No charitable deduction for college athletic seating rights. For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to buy tickets or seating at an athletic event. (Code Sec. 170(l))
Miscellaneous itemized deduction suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there’s no deduction for miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) floor. (Code Sec. 67(g))
“Pease” limit on itemized deductions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limit” on itemized deductions is suspended. (Code Sec. 68(f)) Under this limit, the otherwise allowable amount of certain itemized deductions was reduced by 3% of the amount of a taxpayer’s AGI exceeding a threshold amount; the total reduction couldn’t be greater than 80% of all itemized deductions.
Other suspensions: The following exclusions and deductions don’t apply for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026:
…The exclusion from gross income and wages for qualified bicycle commuting reimbursements. (Code Sec. 132(f)(8))
…The exclusion for qualified moving expense reimbursements, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 132(g))
…The deduction for moving expenses, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 217(k))
Additionally, for tax years beginning after Dec. 22, 2017, members of Congress cannot deduct living expenses when they are away from home. (Code Sec. 162(a))
AMT exemption amounts increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the alternative minimum tax (AMT) exemption amounts for individuals are increased to be the following amounts:
…For joint returns and surviving spouses, $109,400.
…For single taxpayers, $70,300.
…For marrieds filing separately, $54,700. (Code Sec. 55(d)(4))
The above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the taxpayer’s alternative minimum taxable income (AMTI) exceeds the following increased phase-out amounts:
…For joint returns and surviving spouses, $1 million.
…For all other taxpayers (other than estates and trusts), $500,000.
Limited exclusion for student loans. For discharges of debt after Dec. 31, 2017 and before Jan. 1, 2026, the amount of certain student loans that are discharged on account of death or total and permanent disability of the student is excluded from gross income. (Code Sec. 108(f))
Child tax credit increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. (Code Sec. 24(h)(2)) Other modifications to the child tax credit are:
- The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation).
- A $500 nonrefundable credit is provided for certain non-child dependents.
- The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.
- No credit is allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child’s SSN. (Code Sec. 24(h))
New excess business loss limitation. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the excess farm loss limitation of former Code Sec. 461(j) doesn’t apply, and instead a noncorporate taxpayer’s “excess business loss” is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent tax years. This limitation applies afterthe application of the Code Sec. 469 passive loss rules. (Code Sec. 461(l))
An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer’s trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation. (Code Sec. 461(l)(3))
For a partnership or S corporation, the new rule applies at the partner- or shareholder-level.
Gambling loss limit modified. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limit on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. (Code Sec. 165(d))
Deduction for personal casualty & theft losses suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there’s no itemized deduction for personal casualty and theft losses, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h)(5)) However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed the gain.
