From the Pyke Family of Firms April 2018 Newsletter
The Tax Cuts and Jobs Act of 2017 was a landmark decision with implications for all taxpayers beginning in 2018. With the most significant changes since 1986, the law generally reduces income tax rates for the vast majority of Americans. The details and nuances of the law continue to be dissected, but the themes can largely be outlined as follows:
Changes In The Individual Income Tax Rates. Your so-called “ordinary” income (e.g., compensation, interest income, most retirement income, and net short-term capital gains) is taxed at increasing tax rates that apply to different ranges of income. Under prior law, there were seven “ordinary” income tax rates as follows: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Starting in 2018, although the New Law retains seven ordinary income tax brackets, it changes the rates as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Repeal Of Personal Exemption Deduction.Starting in 2018, the New Law repeals the personal exemption deduction for tax- payers and their dependents.
Increased Standard Deduction. The New Law increases the Standard Deduction to the following levels for 2018: Joint Return – $24,000 (up from $13,000); Single – $12,000 (up from $6,500); and Head-of-Household – $18,000 (up from $9,550).
New Limits On The Home Mortgage Interest Deduction. For 2017, individuals are generally allowed an itemized deduction for home mortgage interest paid on up to $1,000,000 ($500,000 for married individuals filing separately) of Acquisition Indebtedness (i.e., Funds borrowed to purchase, construct, or substantially improve your principal or second residence and secured by that residence).
New Limitation On The “State And Local” Tax Deduction.Starting in 2018, the aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) is limited to $10,000 ($5,000 for married filing separately). However, deductions continue to be allowed for state, local, and foreign property taxes, and sales taxes paid or incurred in carrying on the taxpayer’s trade or business (e.g., tax- payer’s Schedule C, Schedule E, or Schedule F operations) or in connection with the taxpayer’s production of income.
Changes To The Charitable Contribution Deduction. The New Law retains the charitable contribution deduction with the following changes starting in 2018:1. The 50% AGI limitation under prior law for cash contributions to public charities and certain other organizations is increased to 60%, and 2. A charitable contribution deduction is no longer allowed for contributions made to colleges and universities in exchange for the contributor’s right to purchase tickets or seating at an athletic event (prior law allowed the taxpayer to deduct 80% as a charitable contribution).
Modifications To The Deduction For Qualified Medical Expenses. The New Law generally retains the existing rules for medical expense deductions. However, for tax years beginning in 2017 and 2018, for both regular tax purposes and AMT purposes, a taxpayer may deduct medical expenses to the extent they exceed 7.5% (down from 10%) of his or her AGI. The 7.5% threshold reverts back to 10% after 2018.
529 Plans Allowed To Pay K-12 Tuition.Starting in 2018, the New Law allows 529 plans to pay up to $10,000 per year of qualified tuition in connection with the enrollment or attendance of the designated beneficiary at a public, private, or religious elementary or secondary school. Caution! This annual $10,000 limitation applies on a per-student basis. Thus, an individual who is a designated beneficiary of multiple §529 plans may receive total distributions for K-12 expenses during a taxable year of no more than $10,000.
Current Unified Estate Tax Exclusion Amount And GST Exemption Amount Doubled.Effective for individuals dying and generation skipping trans- fers after 2017 and before 2026. The New Law increases the Basic Unified Exclusion Amount for gift and estate tax purposes and the generation-skipping exemption amount to $10,000,000 (as indexed for inflation [i.e., $11,200,000 for 2018]). Previously, the exclusion and exemption amounts for 2018 were scheduled to be $5,600,000.
These sweeping changes can be difficult to understand, and we certainly encourage you to call our firm before implementing any tax planning techniques discussed in this letter. It is difficult to properly evaluate a particular planning strategy without calculating your overall tax liability with and without the new strategy. Please feel free to call our office to speak with one of our advisors regarding your personal tax situation.