The Tax Cuts and Jobs Act leg­is­la­tion was signed into law on Decem­ber 22, 2017. The Act makes exten­sive changes that affect both indi­vid­u­als and busi­ness­es. Some key pro­vi­sions of the Act are dis­cussed below. Most pro­vi­sions are effec­tive for 2018. Many indi­vid­ual tax pro­vi­sions sun­set and revert to pre-exist­ing law after 2025; the cor­po­rate tax rates pro­vi­sion is made per­ma­nent. Com­par­isons below are gen­er­al­ly for 2018.

Indi­vid­ual income tax rates

Pre-exist­ing law. There were sev­en reg­u­lar income tax brack­ets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

New law. There are sev­en tax brack­ets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These pro­vi­sions sun­set and revert to pre-exist­ing law after 2025.

 

Income Brack­et Thresh­olds
Tax Rate Sin­gle Mar­ried Fil­ing Jointly/ Sur­viv­ing Spouse Mar­ried Fil­ing Sep­a­rate­ly Head of House­hold Trust/Estate
10% $0 $0 $0 $0 $0
12% $9,525 $19,050 $9,525 $13,600 N/A
22% $38,700 $77,400 $38,700 $51,800 N/A
24% $82,500 $165,000 $82,500 $82,500 $2,550
32% $157,500 $315,000 $157,500 $157,500 N/A
35% $200,000 $400,000 $200,000 $200,000 $9,150
37% $500,000 $600,000 $300,000 $500,000 $12,500

 

Stan­dard deduc­tion, item­ized deduc­tions, and per­son­al exemp­tions

Pre-exist­ing law. In gen­er­al, per­son­al (and depen­den­cy) exemp­tions were avail­able for you, your spouse, and your depen­dents. Per­son­al exemp­tions were phased out for those with high­er adjust­ed gross incomes.

You could gen­er­al­ly choose to take the stan­dard deduc­tion or to item­ize deduc­tions. Addi­tion­al stan­dard deduc­tion amounts were avail­able if you were blind or age 65 or old­er.

Item­ized deduc­tions includ­ed deduc­tions for: med­ical expens­es, state and local tax­es, home mort­gage inter­est, invest­ment inter­est, char­i­ta­ble gifts, casu­al­ty and theft loss­es, job expens­es and cer­tain mis­cel­la­neous deduc­tions, and oth­er mis­cel­la­neous deduc­tions. There was an over­all lim­i­ta­tion on item­ized deduc­tions based on the amount of your adjust­ed gross income.

New law. The stan­dard deduc­tion is sig­nif­i­cant­ly increased, and the addi­tion­al stan­dard deduc­tion amounts for those over age 65 or blind are still avail­able. The per­son­al and depen­den­cy exemp­tions are no longer avail­able.

Many item­ized deduc­tions are elim­i­nat­ed or restrict­ed. The over­all lim­i­ta­tion on item­ized deduc­tions based on the amount of your adjust­ed gross income is elim­i­nat­ed.

  • The 10% of AGI floor for the deduc­tion of med­ical expens­es is reduced to 7.5% in 2017 and 2018 (for reg­u­lar tax and alter­na­tive min­i­mum tax).
  • The deduc­tion for state and local tax­es is lim­it­ed to $10,000. An indi­vid­ual can­not pre­pay 2018 income tax­es in 2017 in order to avoid the dol­lar lim­i­ta­tion in 2018.
  • The deduc­tion for mort­gage inter­est is still avail­able, but the ben­e­fit is reduced for some indi­vid­u­als, and inter­est on home equi­ty loans is no longer deductible.
  • The char­i­ta­ble deduc­tion is still avail­able, but mod­i­fied.
  • The deduc­tion for per­son­al casu­al­ty loss­es is elim­i­nat­ed unless the loss is incurred in a fed­er­al­ly declared dis­as­ter.

These pro­vi­sions sun­set and revert to pre-exist­ing law after 2025.

Stan­dard deduc­tion, item­ized deduc­tions, and per­son­al exemp­tions

Per­son­al and Depen­den­cy Exemp­tions (you, your spouse, and depen­dents)
Pre-exist­ing law New law
Exemp­tion $4,150 No per­son­al exemp­tion

 

Stan­dard Deduc­tion
Pre-exist­ing law New law
Mar­ried fil­ing joint­ly $13,000 $24,000
Head of house­hold $9,550 $18,000
Single/married fil­ing sep­a­rate­ly $6,500 $12,000
Addi­tion­al aged/blind
Single/head of house­hold $1,600 $1,600
All oth­er fil­ing sta­tus­es $1,300 $1,300

 

Item­ized Deduc­tions
Pre-exist­ing law New law
Med­ical expens­es Yes, to extent expens­es exceed 10% of AGI floor Yes, 10% AGI floor reduced to 7.5% for 2017 and 2018
State and local tax­es Yes, income (or sales) tax, real prop­er­ty tax, per­son­al prop­er­ty tax Yes, lim­it­ed to $10,000 ($5,000 for mar­ried fil­ing sep­a­rate­ly)
Home mort­gage inter­est Yes, lim­it­ed to $1,000,000 ($100,000 for home equi­ty loan), one-half those amounts for mar­ried fil­ing sep­a­rate­ly Yes, lim­it­ed to $750,000 ($375,000 for mar­ried fil­ing sep­a­rate­ly), no home equi­ty loan; the $1,000,000/$500,000 lim­it still applies to debt incurred before Decem­ber 16, 2017
Char­i­ta­ble gifts Yes Yes, 50% AGI lim­it raised to 60% for cer­tain cash gifts
Casu­al­ty and theft loss­es Yes Fed­er­al­ly declared dis­as­ters only
Job expens­es and cer­tain mis­cel­la­neous deduc­tions Yes No

 

Child tax cred­it

Pre-exist­ing law. The max­i­mum child tax cred­it was $1,000. The child tax cred­it was phased out if mod­i­fied adjust­ed gross income exceed­ed cer­tain amounts. If the cred­it exceed­ed the tax lia­bil­i­ty, the child tax cred­it was refund­able up to 15% of the amount of earned income in excess of $3,000 (the earned income thresh­old).

New law. The max­i­mum child tax cred­it is increased to $2,000. A non­re­fund­able cred­it of $500 is avail­able for qual­i­fy­ing depen­dents oth­er than qual­i­fy­ing chil­dren. The max­i­mum refund­able amount of the cred­it is $1,400, indexed for infla­tion. The amount at which the cred­it begins to phase out is increased, and the earned income thresh­old is low­ered to $2,500. The changes to the cred­it sun­set and revert to pre-exist­ing law after 2025.

 

Child Tax Cred­it
Pre-exist­ing law New law
Max­i­mum cred­it $1,000 $2,000
Non-child depen­dents N/A $500
Max­i­mum refund­able $1,000 $1,400 indexed
Refund­able earned income thresh­old $3,000 $2,500
Cred­it phase­out thresh­old
Single/head of house­hold $75,000 $200,000
Mar­ried fil­ing joint­ly $110,000 $400,000
Mar­ried fil­ing sep­a­rate­ly $55,000 $200,000

 

Alter­na­tive min­i­mum tax (AMT)

Under the Act, the alter­na­tive min­i­mum tax exemp­tions and exemp­tion phase­out thresh­olds are increased. The AMT changes sun­set and revert to pre-exist­ing law after 2025.

 

Alter­na­tive Min­i­mum Tax (AMT)
Pre-exist­ing law New law
Max­i­mum AMT exemp­tion amount $86,200 (MFJ), $55,400 (Single/HOH), $43,100 (MFS) $109,400 (MFJ), $70,300 (Single/HOH), $54,700 (MFS)
Exemp­tion phase­out thresh­old $164,100 (MFJ), $123,100 (Single/HOH), $82,050 (MFS) $1,000,000 (MFJ), $500,000 (Sin­gle, HOH, MFS)
26% rate applies to AMT income (AMTI) at or below this amount (28% rate applies to AMTI above this amount) $191,500 (MFJ, Sin­gle, HOH), $95,750 (MFS) $191,500 (MFJ, Sin­gle, HOH), $95,750 (MFS)

 

Kid­die tax

Instead of tax­ing most unearned income of chil­dren at their par­ents’ tax rates (as under pre-exist­ing law), the Act tax­es chil­dren’s unearned income using the trust and estate income tax brack­ets. This pro­vi­sion sun­sets and reverts to pre-exist­ing law after 2025.

Cor­po­rate tax rates

Under the Act, cor­po­rate income is taxed at a 21% rate. The cor­po­rate alter­na­tive min­i­mum tax is repealed.

Spe­cial pro­vi­sions for busi­ness income of indi­vid­u­als

Under the Act, an indi­vid­ual tax­pay­er can deduct 20% of domes­tic qual­i­fied busi­ness income (excludes com­pen­sa­tion) from a part­ner­ship, S cor­po­ra­tion, or sole pro­pri­etor­ship. The ben­e­fit of the deduc­tion is phased out for spec­i­fied ser­vice busi­ness­es with tax­able income exceed­ing $157,500 ($315,000 for mar­ried fil­ing joint­ly). The deduc­tion is lim­it­ed to the greater of (1) 50% of the W‑2 wages of the tax­pay­er, or (2) the sum of (a) 25% of the W‑2 wages of the tax­pay­er, plus (b) 2.5% of the unad­just­ed basis imme­di­ate­ly after acqui­si­tion of all qual­i­fied prop­er­ty (cer­tain depre­cia­ble prop­er­ty). This lim­it does not apply if tax­able income does not exceed $157,500 ($315,000 for mar­ried fil­ing joint­ly), and the lim­it is phased in for tax­able income above those thresh­olds. This pro­vi­sion sun­sets and reverts to pre-exist­ing law after 2025.

Retire­ment plans

Under the Act, the con­tri­bu­tion lev­els for retire­ment plans remain the same. How­ev­er, the Act repeals the spe­cial rule per­mit­ting a rechar­ac­ter­i­za­tion to unwind a Roth con­ver­sion.

Estate, gift, and gen­er­a­tion-skip­ping trans­fer tax

The Act dou­bles the gift and estate tax basic exclu­sion amount and the gen­er­a­tion-skip­ping trans­fer tax exemp­tion to about $11,200,000 in 2018. This pro­vi­sion sun­sets and reverts to pre-exist­ing law after 2025.

Health insur­ance indi­vid­ual man­date

The Act elim­i­nates the require­ment that indi­vid­u­als must be cov­ered by a health care plan that pro­vides at least min­i­mum essen­tial cov­er­age or pay a penal­ty tax (the indi­vid­ual shared respon­si­bil­i­ty pay­ment) for fail­ure to main­tain the cov­er­age. The pro­vi­sion is effec­tive for months begin­ning after Decem­ber 31, 2018.

Con­tent Pro­vid­ed by: Broad­ridge Finan­cial Solu­tions, Inc.

Decem­ber 2017