2018.12.06
Category : TAX

How the Tax Cuts & Jobs Act Will Affect Individual Tax Payers and Their Bottom Lines

The Tax Cuts and Jobs Act has brought upon many changes that taxpayers need to be aware of.  These changes will greatly impact the bottom line of most taxpayers in a good way.  Most of the middle class will benefit from the changes listed below as their tax liability will go down starting in 2018.

• One of the biggest deductions this year is the Standard Deduction which increased from $6,350 in 2017 to $12,000 in 2018 for a single filer and $12,700 to $24,000 for married joint filers. What this essentially means is that most people will not be itemizing this year because of the hefty standard deduction. Your tax planner/tax preparer should figure out whether it makes sense to take a standard deduction one year and perhaps itemize the next to limit an individual’s tax liability.  If you are itemizing, lawmakers have done away with the phaseout of itemized deductions, which is very good news for high net worth individuals.
• Senior citizens (65 and over) get $1,300 per person if married and $1,600 more if single.
• Personal Exemptions have been repealed by the new law as well as exemptions for dependents.
• Interest on Home Mortgages can only be taken up to $750,000 which is less than previous years where interest can be taken on mortgages up to a cool $1,000,000. This only applies to mortgages on properties acquired after December 14, 2017.
• Interest on Home Equity Lines are no longer deductible if the funds are used for personal expenses such as credit card debt repayment.
• The SALT deduction (State and Local Taxes) is now being capped at $10,000. If your property and state taxes exceed the $10,000 mark, you are going to feel it in 2018, particularly homeowners who live on the coasts (New York, California). Long Islanders who pay hefty property taxes will feel it the most.  Prepaying state and local taxes in 2017 were disallowed by the IRS. 
• The deduction for Medical Expenses was not eliminated, rather it was boosted, which is a good sign for the elderly as well as other taxpayers with large medical bills. It used to be that you can only deduct medical expenses above 10% of AGI (Adjusted Gross Income – Income After Deductions), however, lawmakers have reduced the threshold to 7.5%.
• The individual mandate or penalty imposed by Obamacare has been repealed by the TCJA, however it still applies for 2018. So, understand that if you don’t have health insurance in 2018, you will most likely pay a fine.
• While personal exemptions and exemptions for dependents have been done away with, there is a silver lining. The Child Tax Credit which used to be $1,000 per dependent under the age of 17, has now been doubled to $2,000. A sigh of relief for large families. 
• There have been changes to the Kiddie Tax in 2018 that will affect the rate that unearned income that a qualifying child will be taxed on. If your child earns more than $2,100 in unearned income, the applicable tax rate that child will pay will be based on the tax brackets which are applicable to trusts and estates (10% on income up to $2,550 and up to 37% on income over $12,500). The tax rates for the child’s long-term capital gains and qualified dividends are also revamped (0% for capital gains up to $2,600 and 20% for capital gains income over $12,700).  I will dedicate a whole other blog post to the Kiddie Tax because I believe it’s something that should be taken into consideration.
• For investors, tax rates on Long Term Capital Gains and Qualified Dividends have not changed, but Congress decided to base the tax on those gains and dividends based on income thresholds they set, instead of the tax brackets that defined individuals in earlier tax years. Taxpayers with taxable income under $38,600 (single) and $77,200 (joint) will still enjoy a 0% rate. Taxpayers with a 20% tax rate will be applied to $425,800 for single filers and $479,000 for joint filers. The 15% rate applies to taxpayers between those income thresholds.  Also, taxpayers need to take into consideration the 3.8% surtax on net investment income for single filers with a Modified AGI over $200,000 and for joint filers with a Modified AGI over $250,000.  I believe this new way of calculating taxes on investment income reduces tax liability significantly. 
• Congress has also doubled the lifetime Estate and Gift Tax Exemption to $11,180,000. This is a significant change if you have a sizeable estate and you are a high net worth individual, and I believe that many taxpayers in this position will need an estate planner and an estate attorney to set up certain trusts for the time period that this is in effect. The Annual Gift Tax Exclusion for 2018 is $15,000 per donation.  Understand that the donor still must pay tax on that donation, and its only the recipient that is tax exempt. 
• The Alternative Minimum Tax is still in effect but with higher overall exemptions and indexed for inflation. I will get into that in a future blog, but all in all it seems that most taxpayers will not have to worry about the AMT tax unless they are making above $500,000 as a single filer or $1,000,000 filing jointly.
• Write-offs subject to the 2% of AGI threshold have been eliminated. These might include employee business expenses, brokerage fees, tax preparation fees, etc. Personal property casualty losses cannot be written off as well unless they occurred in disaster areas.  Alimony paid cannot be written off as well, but this will be in effect after 2018, so if you’re in the unfortunate situation of going through a divorce and paying alimony, it may be prudent to get that divorce by December 31, 2018.

These changes are set to last from 2018 – 2025, after which, it will either alter back to the 2017 rules or not depending on the lawmakers.  There are other changes that I will get into in future blog posts, but I believe the ones that I listed here should be read and taken into context by each individual tax payer.  Please don’t hesitate to call AccountSavvy CPAs for a free consultation for the 2018 tax year and how it will affect your taxes. 

Written By Rafael Borukhov