The Tax Cuts And Jobs Act ("TCJA") was passed by the United States Congress on December 20, 2017 and signed into law on December 22, 2017. The effective date of the new tax provisions is January 1, 2018. This sweeping change in the tax laws will have impact on essentially all taxpayers, individuals and businesses. The purpose of this brief article is to highlight the significant provisions of the new tax law and provide basic illustrations of the impact of the new tax law as compared to the immediate prior tax laws in a variety of settings for individual taxpayers.
Significant provisions of TCJA:
As shown below, the (Regular) Standard Deduction for all taxpayers has been significantly increased under the new tax law. As a consequence, taxpayer's ability to qualify to Itemized Deductions will significantly diminish under the new tax law. With Schedule A (Itemized Deductions) being perhaps the most audited tax form, taxpayer compliance will greatly increase under the new tax. Some of the most notable changes in Itemized Deductions (and other provisions) under TCJA are discussed below.
STATE AND LOCAL TAXES
Itemized Deductions for State And Local Taxes are now capped at a maximum of $10,000 ($5,000 for Married Filing Separately taxpayers) per year. This limitation will have potential significant impact on taxpayers in jurisdictions with high State And Local Income Taxation and less impact on taxpayers in states such as Texas (and the other six (6) states) that have no State Income Taxation. (However, this will impact taxpayers in the State Of Texas as Sales Taxes have been typically deducted as Itemized Deductions in lieu of State And Local Income Taxes as Sales Taxes (State And Local) also fall under this $10,000 ($5,000) annual limitation).
The deductibility of Property Taxes on real estate (and in certain cases Personal Property) are likewise subject to the $10,000 ($5,000) annual limitation on the deductibility of State And Local Taxes under TCJA.
QUALIFIED RESIDENCE INTEREST (MORTGAGE INTEREST)
TCJA brings significant changes regarding the deductibility of Qualified Residence Interest (Home Mortgage Interest). Under TCJA, the maximum qualified indebtedness (Acquisition Debt (Indebtedness)) in which interest can be computed for deduction purposes is $750,000 ($375,000 for Married Filing Separately taxpayers), down from $1,000,000 ($500,000 Married Filing Separately taxpayers) under prior tax law. (The new limits apply to debts incurred after December 15, 2017). Moreover, the deductibility of Home Equity Loan Interest has been substantially reduced (limited only to home equity loans used to buy, build or substantially improve the taxpayer's home that secures the loan) under the new tax law.
PERSONAL CASUALTY LOSSES
Personal Casualty Losses for fire, storm, shipwreck, theft and other casualties which have been permitted for many, many years have been repealed under TCJA except in cases of Personal Casualty Losses arising from federally declared natural disasters (subject to the same $100 per casualty floor and ten percent (10%) of Adjusted Gross Income (AGI) as before under prior law.). This is another area where compliance has been of concern which such concern is greatly reduced with this new provision in TCJA.
TCJA increase the limitation on charitable contributions to sixty percent (60%) (from fifty percent (50%)) of the taxpayer's Adjusted Gross Income (AGI) for a given year for cash contributions. As under prior tax law, cash contributions in excess of this sixty percent (60%) limit may be carried forward to the next five (5) succeeding tax years in order of time. Despite the increase in the allowed annual limitation for cash contributions, charitable contributions may decline in future years as the higher (Regular) Standard Deduction discussed below will prevent many taxpayers from qualifying to Itemized Deductions and, thereby, reduce incentive by those taxpayers to make Charitable Contributions.
For the year of 2018, deductible Medical Expenses must exceed seven and one-half percent (7.5%) of the taxpayer's Adjusted Gross Income (AGI) for all taxpayers. Beginning January 1, 2019, deductible Medical Expenses must exceed ten percent (10%) of the taxpayer's Adjusted Gross Income (AGI) for all taxpayers. This ten percent (10%) limit has been the case since 2013 for taxpayers not age 65 or older but this new provision beginning in the year of 2019 now applies to taxpayers age 65 or older as well as all other taxpayers. (These percents also apply to the Alternative Minimum Tax (AMT) for each respective tax year).
TAX PREPARATION FEES
Tax Preparation Fees are no longer deductible under TCJA which such were allowed with other Miscellaneous Itemized Deductions that exceeded two percent (2%) of the taxpayer's Adjusted Gross Income (AGI) under prior tax law.
EMPLOYEE BUSINESS EXPENSES
Unreimbursed Employee Expenses are no longer deductible as Miscellaneous Itemized Deductions (that exceeded two percent (2%) of the taxpayer's Adjusted Gross Income (AGI)) as under prior tax law.
PROFESSIONAL AND UNION DUES
Professional And Union Dues are no longer deductible as Miscellaneous Itemized Deductions (that exceeded two percent (2%) of the taxpayer's Adjusted Gross Income (AGI)) as under prior tax law.
The Overall Limitation of Itemized Deductions for high income taxpayers is eliminated under TCJA.
ALIMONY PAYMENTS (INCOME)
For the year of 2018, deduction for Alimony Payments and inclusion of Income for the recipient remains the same as under prior law. However, no deduction is allowed for Alimony Payments for Divorce Decrees executed after December 31, 2018. Likewise, no Taxable Income is incurred by the recipient of the Alimony Payments as was the case under prior tax law.
Moving Expenses are no longer deductible for the taxpayer under TCJA beginning January 1, 2018 (except from members of the Armed Forces who move pursuant to permanent orders). In addition, the reimbursement of Moving Expenses by the employer will now be treated as taxable income to the employee (and deductible by the employer) under TCJA and not tax-free as was the case under prior tax law.
EMPLOYER EDUCATION PAYMENTS
The tax-free provision of Employer Education Payments made on behalf of employees continues under TCJA (at a maximum of $5,250 per year). PAYMENTS TO 529 PLANS Payments to Qualified 529 Plans are now expanded beyond post-secondary education expenses to include K-12 private school education expenses. Contributions (up to $10,000 per year per student (designated beneficiary)) to Qualified 529 Plans are not deductible but the earnings are tax-free when used for qualified education expenses of the designated beneficiary.
STUDENT LOAN INTEREST
Student Loan Interest deduction remains unchanged under TCJA. (An annual deduction of a maximum of $2,500 is allowed as under prior tax law subject to phase-out for higher income taxpayers).
As stated above, TCJA greatly increased (nearly doubled over the most recent tax year) the Regular Standard Deduction for all taxpayers. Beginning January 1, 2018, the Regular Standard Deduction for taxpayers by Filing Status is as follows:
|Filing Status||Regular Standard Deductions|
|Head of Household||$18,000|
|Married Filing Jointly||$24,000|
|Married Filing Separately||$12,000|
These substantial increases in the Regular Standard Deduction will greatly reduce the number of taxpayers that will qualify to Itemized Deductions. As a result, taxpayer compliance will significantly increase. The Additional Standard Deduction for taxpayers age 65 or older and/or blind continues as under the prior tax law. (All Standard Deductions (Regular and Additional) will be adjusted (indexed) annually for inflation).
The Personal Exemption ($4,050 each for the most recent tax year) for the taxpayers and their dependents is entirely eliminated under TCJA. The impact of this elimination will be somewhat offset by the increased Regular Standard Deduction discussed immediately above and the increased Child Tax Credit discussed below. In addition, the elimination of the Personal Exemption will also have significant impact in regards to taxpayer compliance as in prior tax years a dependent has often been claimed on more than one (1) tax return. The elimination of the Personal Exemption will have a very positive impact on overall taxpayer compliance in future tax years as the claiming of the same dependent on more than one (1) tax return will no longer be possible.
AMERICAN OPPORTUNITY TAX CREDIT
The tremendous popular and beneficial American Opportunity Tax Credit will remain unchanged under TCJA. The American Opportunity Tax Credit is a maximum of $2,500 per year ($1,000 refundable per year) per eligible student for the first four (4) years of post-secondary education (enrolled at least half-time).
LIFETIME LEARNING TAX CREDIT
The Life Learning Tax Credit will remain unchanged under TCJA. The Lifetime Learning Tax Credit is a maximum of $2,000 per year for all eligible students (not refundable) with no time limit or minimum enrollment requirement.
CHILD TAX CREDIT
The Child Tax Credit under TCJA has been increased to $2,000 per eligible child with a maximum of $1,400 refundable from $1,000 per eligible child and a maximum of $1,000 refundable under the immediate prior tax law. The age of the eligible child remains as under the age of 17 as under prior tax law. The beginning of the phase-out of the Child Tax Credit is greatly increased (more than doubled) and the earned income requirement slightly lowered for the refundable portion of the credit. This increase in the Child Tax Credit somewhat offsets the impact of the complete elimination of the Personal Exemption under TCJA discussed above.
FAMILY FLEXIBILITY CREDIT
Related to the Child Tax Credit, a $500 Family Flexibility Credit (not refundable) applies for dependents that are not a child of the taxpayer subject to the same phase-outs as the Child Tax Credit.
INDIVIDUAL TAX RATES
Under TCJA, the number of individual tax rates remain at seven (7) total Tax Rates as under the immediate prior tax law but the rates now range from 10% to 37% as opposed to 10% to 39.6% under the immediate prior tax law. The seven (7) Tax Rates under TCJA are lower at each comparable level except for the first Tax Rate of 10% and the sixth rate of 35% and applies mostly to a higher range of Taxable Income at each Tax Rate level.
CAPITAL GAIN TAX RATES
Under TCJA, the Capital Gains Tax Rates for Qualified Dividends and Long-Term Capital Gains remain the same as under immediate prior tax law of 10%, 15% and 20% with slight acceleration of when the Capital Gain Tax Rates apply (not exactly matching the Tax Brackets as under prior tax law): 0% almost all of the two (2) lowest tax brackets, 15% almost for the next five (5) tax brackets and 20% for most of all of the highest tax bracket.
ALTERNATIVE MINIMUM TAX
The Alternative Minimum Tax Exemption for individuals have greatly increased beginning January 1, 2018 under TCJA. The Alternative Minimum Tax Exemption for 2018 for individuals by Filing Status is as follows:
|Filing Status||Regular Standard Deductions|
|Head of Household||$70,300|
|Married Filing Jointly||$109,400|
|Married Filing Separately||$54,700|
The beginning of the phase-out of the Alternative Minimum Tax Exemption has been greatly expanded allowing most taxpayers to retain the full Exemption Amount. Moreover, the Alternative Minimum Tax Rates of 26% of the first $175,000 ($87,500 for Married Filing Separately taxpayers) of Alternative Minimum Taxable Income and 28% for Alternative Minimum Taxable Income in excess of $175,000 ($87,500 for Married Filing Separately taxpayers) is the same under TCJA as under immediate prior tax law (adjusted annually for inflation with the 2018 adjusted amounts being the first $191,500 ($95,750 for Married Filing Separately taxpayers) of Alternative Minimum Taxable Income and 28% for Alternative Minimum Taxable Income in excess of $191,750 ($95,750 for Married Filing Separately taxpayers). However, the significant increase in the Alternative Minimum Tax Exemption will result in many taxpayers not being subject to the Alternative Minimum Tax under TCJA as opposed to immediate prior tax law. (The Alternative Minimum Tax Exemptions shown above and the beginning of the phase-out amounts will be adjusted (indexed) annually for inflation).
BASIC ILLUSTRATIONS OF IMPACT OF NEW TAX LAW
The impact of the myriad of changes in the new tax law will vary from taxpayer to taxpayer depending on many factors such as the make-up of their family unit, whether they qualified for Itemized Deductions under prior tax laws and the like. Below are hypothetical scenarios of individual taxpayers comparing the tax results for the year of 2018 of the new tax law (TCJA) and the immediate prior tax law.
|State and Local Income Taxes||$3,000||$3,000||$5,000||$5,000||$9,000||$9,000||$9,000||$9,000|
|Net Tax Liability* (Single - No Dependents)||$17,616||$16,130|
|Net Tax Liability* (HOH - 1 Child **)||$21,810||$18,978|
|Net Tax Liability* (MFJ - No Dependents)||$55,807||$49,539|
|Net Tax Liability* (MFJ - 2 Children**)||$53,095||$45,539|
|Tax Increase (Tax Savings of TCJA)||($1,486)||$2,832||$6,268||$7,556|
* Based on projected Personal Exemption amount for 2018 before the passage of TCJA of $4,150, Regular Standard Deduction of $6,550 (Single), $9,550 (Head Of Household) and $13,000 (Married Filing Jointly) and ranges of Taxable Income for each Tax Rate (And Exclusive of Alternative Minimum Tax and Net Investment Income Tax, if applicable).
** All under the age of seventeen (17) years of age (Child Tax Credit of $2,000 per eligible child is taken into account in determining the Net Tax Liability for TCJA computations above where applies) (Child Tax Credit of $1,000 per eligible child is fully phased-out in both cases above for the Prior Tax Law computations)
The two (2) most profound impact of TCJA as it relates to corporations is the introduction of a single Tax Rate ("Flat Rate") of 21% (regardless of the level of taxable income) (down from a maximum Tax Rate of 35% under immediate prior tax law) and the elimination of the Alternative Minimum Tax (AMT) for corporations both effective January 1, 2018. (The AMT credit carryovers from prior tax years will still be allowed going forward to the extent of the Regular Tax Liability. Moreover, to the extent that the AMT credit carryover exceeds the Regular Tax Liability, fifty percent (50%) of the excess AMT credit carryovers will be refundable in 2018, 2019 and 2020 and the remainder fully refundable in 2021). The impact of these two (2) changes will have enormous impact on many corporations and, as a consequence, the United States economy. It will be interesting to learn in the next few years the extent of this impact on corporations and the United States economy.
PASS THROUGH ENTITIES (SOLE PROPRIETORS, PARTNERSHIPS, S CORPORATIONS, ETC.)
A special deduction for non-corporate taxpayers of twenty percent (20%) of Qualified Business Income (QBI) earned in a trade or business is allowed under TCJA subject to certain limitations.
ESTATES GIFTS AND TRUSTS
The Income Tax Rates for Estates And Trusts are slightly lowered under TCJA with the same ranges of Taxable Income as the immediate prior tax law (although a higher rate applies to the next highest range of Taxable Income). In addition, the tax-free portion of an Estate ("Exemption Equivalent") for Estate And Gift Tax purposes has increased (doubled) from $5,000,000 to $10,000,000 adjusted annually for inflation. The 2018 adjusted amount is $11,180,000. The Estate And Gift Tax rates remain the same (18% to 40%). Moreover, the Alternative Minimum Tax still applies for Estates and Trusts under TCJA with an Alternative Minimum Tax Exemption of $24,600 for the year of 2018 (adjusted annually for inflation) and the same Tax Rates and ranges of Taxable Income as for individuals.
H.R. 1 (2018) PUBLIC LAW 115-97– TAX CUTS AND JOBS ACT
INTERNAL REVENUE SERVICE (IRS) WEBSITE (www.irs.gov)
Marvin J. Williams, JD, MBA, CPA, CMA, CFM, CGMA - Professor OF Accounting and Taxation (Unuversity OF Houston-Downtown)