The Tax Cuts and Job 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.
Individual income tax rates
Pre-existing law: There were seven regular tax brackets: 10, 15, 25, 28, 33, 35, and 39.6 percent.
New law: There are seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent. These provisions sunset and revert to pre-existing law after 2025.
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 and 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 percent of AGI floor for the deduction of medical expenses is reduced to 7.5 percent 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 limitations 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.
Child tax credit
Pre-existing law: The maximum child tax credit was $1,000. The child tax credit was phased out if rackets. child tax credit was refundable up to 15 percent 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.
Kiddie tax
Instead of taxing most unearned income of children at their parents’ tax rates (as under per-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 percent rate. The corporate alternative minimum tax is repealed.
Special provisions for business income of individuals
Under the Act, an individual taxpayer can deduct 20 percent 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 percent of the W-2 wages of the taxpayer or (2) the sum of (a) 25 percent of the W-2 wages of the taxpayer, plus (b) 2.5 percent 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 for married filing jointly. ($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.
From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.
The foregoing article contains general legal information only and is not intended to convey legal advice. For legal advice regarding estate planning, the reader should contact his/her lawyer.
Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.