Special Release - The New Tax Cuts and Jobs Act (TCJA) and How It Could Affect You

Recently, we saw the largest change to the U.S. tax code since 1986 with the passage of the Tax Cuts and Jobs Act (TCJA).   While there are many modifications to the tax code, this article summarizes some of the major changes that impact individuals.

Tax Brackets
The TCJA maintains seven tax brackets but slightly altered the rates and income thresholds. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The previous brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. For 2018 rates and income thresholds, refer to the following document from the Tax Foundation. You can also use the  IRS calculator to help determine appropriate withholdings.  

Bottom Line: Most income levels have had their tax rates lowered, including the top bracket.

Increase of Standard Deduction and Elimination of Personal Exemptions
The TCJA increased the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for taxpayers that are married filing jointly.  As an offset to the standard deduction increases, the act eliminated personal exemptions ($4,050 for 2017). For example, under the new law, a married couple filing jointly would be allowed an additional standard deduction of $11,300 but would lose $8,100 from the personal exemption elimination. 

Bottom Line: Although the standard deduction has increased, this benefit is partially offset by the elimination of personal exemptions.
 

State and Local Tax (SALT) Deductions
One of the most heavily publicized areas of the new tax law is the treatment of state and local tax, or SALT deductions. Beginning in 2018, the total deduction allowed for state and local taxes (including real estate taxes) is $10,000. Previously, taxpayers were not limited in the amount of state and local tax that they could deduct. This cap disproportionately affects areas with a high cost of living, including the D.C. metro area. Those with expensive real estate and property will likely see the amount of their total itemized deductions reduced as a result of this new rule.

Bottom Line:  If you live in a high cost area and have expensive property, your deductions could be limited compared to previous tax years.

Mortgage Interest Deduction
Interest is deductible on the first $750,000 of total mortgage debt under the new act.  This limit is down from $1,000,000 prior to the TCJA. The good news is that mortgages originated prior to 2018 are grandfathered and qualify for the $1,000,000 limit. For home equity, interest on home equity lines of credit (HELOCs) remains deductible—but only if they are used to make improvements to the home. This is a substantial change and was not a requirement for the deduction under the previous tax law. Any outstanding HELOCs not used for home improvement are not grandfathered and therefore the interest is no longer deductible.

Bottom Line:  Deductible interest is capped on the first $750,000 of new mortgages while existing mortgages maintain deductibility up to $1,000,000. HELOCs are deductible, but only if the loan was used for home improvements.

Estate Tax
Federal estate tax exemptions increased to $11,200,000 for individuals and $22,400,000 for married couples, from $5,490,000 and $10,980,000 in 2017, respectively. Portability, or the ability for one exemption to pass to your spouse, still continues.    

Bottom Line:  For those with large enough estates, seek advice from an estate attorney on how the new law may affect your estate planning. 

Education Funding
Qualified higher education expenses have been expanded to include elementary and secondary tuition expenses. Specifically, you are now permitted to distribute up to $10,000 per beneficiary, per tax year, for tuition at a public, private or religious elementary or secondary school. Rollovers are now permitted from a qualified tuition program to an Achieving a Better Life Experience (ABLE) account.

Bottom Line:  Pre-tax benefits on education have been expanded to include elementary and secondary tuition in addition to costs associated with college education. 

Alternative Minimum Tax (AMT) 
AMT exemptions are raised to $70,300 for individuals and $109,400 for married couples, from $54,300 and $84,500 in 2017, respectively. Additionally, the AMT phase-out will be will begin at a much higher income threshold of $500,000 for individuals and $1,000,000 for those married filing jointly. The previous exemptions were phased out beginning at $120,700 for individuals and $160,900 for those married filing jointly.

Bottom Line:  Fewer people will be subjected to AMT under the TCJA. 

Alimony
Under previous tax law, those required to pay alimony could deduct the payment and those receiving alimony classified the payment as income. The TCJA eliminates the ability to deduct the payment of alimony for divorces settled or separation agreement signed after December 31, 2018. Alimony payments that are the result of a divorce prior to 2019 will still be deductible. 

Bottom Line:  For any divorce or separation agreement after 2018, alimony payments will no longer be deductible to the payor

Summary 
Because this act makes many changes to the existing tax law, each individual’s impact may be quite different. Therefore, it is important to discuss with your tax advisor how the new tax law changes may impact you, personally.