After a series of negotiations in both the House and Senate, a final reconciled version of the Tax Cuts and Jobs Act of 2017 (TCJA) appears to be heading to President Trump for signature shortly. Here is a summary of the highlights.
New Tax Brackets
The TCJA tax brackets will be 10%, 12%, 22%, 24%, 32%, 35%, and a top rate of 37%, and will remain in place until the end of 2025, when they will sunset. These new TCJA tax brackets will produce at least a small reduction in marginal tax brackets for virtually all taxpayers, as while the 10% and 35% brackets remain as is, the other 5 tax brackets all received a 1% to 4% reduction in rates.
Capital Gains and Qualified Dividends Retain Old Thresholds
Under current (soon-to-be-prior) law, the thresholds for the 0%, 15%, and 20% long-term capital gains (and qualified dividend) rates are based on the thresholds for the individual tax brackets: those who fall in the 10% and 15% ordinary income brackets get 0% rates, while income in the 25%, 28%, 33%, or 35% brackets gets the 15% capital gains rate, and income in the top 39.6% bracket gets the 20% preferential rate. (In addition, the 3.8% Medicare surtax on Net Investment Income applies on top, producing a maximum capital gains rate of 23.8%.) However, while the TCJA rules introduce new tax brackets and slightly redraw the tax bracket thresholds, preferential rates for long-term capital gains and qualified dividends will continue to use the old thresholds. As a result, preferential capital gains and qualified dividend rates will no longer line up cleanly with the ordinary income tax brackets.
Merging Personal Exemptions into an Expanded Standard Deduction
Under the new rules, the Standard Deduction will be $12,000 for individuals and $24,000 for married couples, as compared to just $6,350 for individuals and $12,700 for married couples under current law (in 2017). And the “additional standard deduction” amount (an extra $1,250 for a blind individual or one over age 65) will continue to apply as well.
Expanded Child Tax Credit
The Child Tax Credit is expanded from $1,000 per qualifying child under the age of 17 (the proposal to increase the age threshold to under 18 did not survive in the final legislation), up to a Child Tax Credit of $2,000 per qualifying child (of which $1,400 is a refundable credit for those whose net tax liability would be more than zeroed out by the credit). In addition, the income phaseout rules for the Child Tax Credit are dramatically increased, from the current thresholds of $75,000 for individuals and $110,000 for married couples, up to $200,000 for individuals and $400,000 for married couples. Although these thresholds are not indexed for inflation.
Itemized Deductions – $10,000 Cap on State & Local Income Tax & Property Tax Deductions
Households can deduct their combined state and local property and income taxes, but only up to a cap of $10,000 combined. The $10,000 limit applies for both individuals and married couples (an indirect marriage penalty for high-income couples), and is reduced to $5,000 for those who are married filing separately.
Itemized Deductions – Temporarily Expanded Medical Expense Deductions for 2017 and 2018
The 10%-of-AGI threshold for medical expense deductions is reduced to just 7.5% of AGI, both retroactively for the now-ending 2017 tax year and the upcoming 2018 tax year. After 2018, the medical expense deduction reverts back to the 10%-of-AGI threshold.
Itemized Deductions – Miscellaneous Deductions Repealed
All miscellaneous itemized deductions that are otherwise subject to the 2%-of-AGI floor under IRC Section 67 are repealed.
529 Plans for Private Schools & Homeschooling
529 plan distributions can now be used tax-free for private elementary and secondary school expenses (for up to $10,000 in distributions per student each year), and include both public, private, or religious schools and homeschooling expenses.
New “Qualified Business Income” 20% Deduction for Pass-Through Entities
Pass-through businesses will be taxed on only 80% of their pass-through income (or alternatively, will effectively be taxed at only 80% of the normal tax bracket rate on all their business income). However, the new rules permitting deductions for pass-through businesses have a number of restrictions in place.
Estate & Gift Tax Exemptions Doubled
The TCJA doubles the unified estate and gift tax exemption amounts from their current levels, which turns the otherwise-scheduled-to-be-$5.6M exemption in 2018 into an $11.2M individual estate tax exemption (or $22.4M for married couples with portability).
Roth Recharacterizations of Prior Conversions Repealed
The Tax Cuts and Jobs Act repeals the rules permitting recharacterizations of Roth conversions, effective starting in 2018. Notably, though, the rule only limits recharacterizations of Roth conversions (and not of Roth contributions), permitting those who mistakenly make a new Roth contribution and later discover they’re over the income limits to recharacterize it back to a traditional IRA. But Roth conversions cannot be recharacterized anymore.
2017 Year End Planning
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