The Tax Cuts and Jobs Act of 2017 (the “Act”) is the largest overhaul of the tax code in more than 30 years. Generally, the Act is effective from January 1, 2018 through December 31, 2025. Although the Act is comprehensive and complicated, this blog will summarize (and attempt to simplify) ten key provisions of the new law.
1. 529 Plans.
Beginning in 2018, the definition of “qualified higher education expenses” is expanded to include tuition at an elementary or secondary schools. The amount of tuition is limited to $10,000 per year/per child.
Effective for divorce or separation agreements signed after December 31, 2018, alimony will not be taxable to the recipient payee and will not be deductible by the payor.
3. Estate and Gift Tax Exemption.
The estate and gift tax exemption has been increased to $11.2 million per person ($22.4 million for married couples).
Personal exemptions are suspended effective for tax years starting after December 31, 2017 and before January 1, 2026 so, starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
5. Health Care Mandate for Individuals.
Beginning in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
6. Miscellaneous Itemized Deductions.
Miscellaneous itemized deductions, such as tax preparation costs, investment expenses, union dues and unreimbursed employee expenses, have been eliminated. These expenses were previously deductible to the extent they exceeded two percent of adjusted gross income.
7. Mortgage and Home Equity Loan Interest.
Mortgage interest on loans used to acquire a principal residence and a second home is deductible up to $750,000 (down from $1 million) for loans taken out in 2018. There is no longer a deduction for interest paid on home equity loans regardless of the year the loan was taken out.
8. New Pass-Through Income Tax Deduction.
Taxpayers are allowed a deduction equal to 20% of the “qualified business income” of an LLC, partnership, S corporation, or sole proprietorship, as long as the income is from a trade or business within the United States. For certain high-income taxpayers (i.e., taxable income above $315,000 for joint filers, (a) a limitation based on W-2 wages paid by the business and depreciable property used in the business is phased in, and (b) income from select trades or businesses is phased out of the “qualified business income” where the principal asset is the reputation or skill of one or more employees or owners; e.g., health, law, consulting, financial services, etc.
9. Standard Deduction.
The standard deduction is increased to $24,000 for married couples filing jointly and $12,000 for single taxpayers (and will be indexed for inflation after 2018). This increase in the standard deduction will likely result in a corresponding reduction in the number of taxpayers who itemize their deductions.
10. Tax Rates.
The new tax rate structure will consist of seven tax brackets ranging from ten percent up to 37 percent. The top rate, which was reduced from 39.6 percent to 37 percent, applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly.