Special report: Update on the Tax Cuts and Jobs Act

 
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For the benefit of Raich Ende Malter clients, we have distilled the tax changes affecting individuals in the H.R. 1 tax bill into a comprehensive, accurate list. The information contained in this list is culled from several reliable sources. We believe these points are the changes most likely to affect you:

  • Lower income tax rates and brackets.
  • The standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.
  • The deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.
  • Child tax credit increased to $2,000 per qualifying child. The credit phases out at $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. Certain non-child dependents will have a nonrefundable $500 credit. Refundable credit amount increases to $1,400 per qualifying child up to the base amount of $2,000. Earned income threshold for the refundable portion of the credit will be reduced from $3,000 to $2,500.
  • “Kiddie tax” law: Taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. (Note: kiddie tax applies to a child if 1) the child either has not attained age 19 by the end of the tax year or is a full-time student under the age of 24, and either parent is alive; 2) the child’s unearned income exceeds $2,100 for 2018; and 3) the child does not file a joint return.)
  • Breakpoints for capital gains taxes remain the same, but will be indexed for inflation using the Chained Consumer Price Index for All Urban Consumers (C-CPI-U).
  • Gambling losses: All deductions for expenses incurred in carrying out wagering transactions (in addition to gambling losses) are limited to the extent of gambling winnings.
  • SALT deductions: For tax years beginning after December 31, 2017 and before January 1, 2026, subject to the exception described below, state, local, and foreign property taxes, and state and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity for the production of income. State and local income, war profits, and excess profits are not allowable as a deduction.
    • A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of 1) state and local property taxes not paid or accrued in carrying on a trade or business or activity and 2) state and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted.
    • For tax years beginning after December 31, 2016, in the case of an amount paid in a tax year beginning before January 1, 2018 with respect to a state or local income tax imposed for a tax year beginning after December 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is so imposed. Therefore, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can’t claim an itemized deduction in 2017 for that prepaid income tax.
  • Mortgage and home equity: For tax years beginning after December 31, 2017 and before January 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).
  • “Binding contract” exception: A taxpayer who has entered into a binding written contract before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, shall be considered to incur acquisition indebtedness prior to December 15, 2017.
  • Refinancing: The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before December 15, 2017, so long as the indebtedness resulting from the refinancing doesn’t exceed the amount of the refinanced indebtedness.
  • Medical expense deductions: For tax years beginning after December 31, 2016 and ending before January 1, 2019, the threshold on medical expense deductions is reduced to 7.5% for all taxpayers. The rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to tax years beginning after December 31, 2016 and ending before January 1, 2019.
  • Charitable contribution deduction limit increased: For contributions made in tax years beginning after December 31, 2017 and before January 1, 2026, the limitation for cash contributions to public charities and private foundations is increased to 60% of AGI. Contributions exceeding the 60% limit are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling.
  • Casualty losses: Under the Act, taxpayers can take a deduction for casualty losses only if the loss is attributable to a declared disaster.
  • Alimony treatment: For any divorce or separation agreement executed after December 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Instead, income used for alimony is taxed at the rates applicable to the payor spouse.
  • Miscellaneous itemized deductions: For tax years beginning after December 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended.
  • “Pease” limitation on itemized deductions is suspended.
  • Repeal of ACA mandate: For months beginning after December 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. This repeal is permanent.
  • Alternative minimum tax (AMT): For tax years beginning after December 31, 2017 and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:
    • For joint returns and surviving spouses, $109,400.
    • For single taxpayers, $70,300.
    • For marrieds filing separately, $54,700.
    • Under the Act, the above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the income of the AMT taxpayer exceeds the phase-out amounts, increased as follows:
      • For joint returns and surviving spouses, $1 million.
      • For all other taxpayers (other than estates and trusts), $500,000.
      • For trusts and estates, the base figure of $22,500 and phase-out amount of $75,000 remain unchanged. All of these amounts will be adjusted for inflation after 2018 under the new Chained Consumer Price Index for All Urban Consumers (C-CPI-U) inflation measure.
  • ABLE account changes: Effective for tax years beginning after the enactment date and before January 1, 2026, the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account’s designated beneficiary can contribute an additional amount, up to the lesser of 1) the Federal poverty line for a one-person household; or 2) the individual’s compensation for the tax year.
  • Expanded use of 529 accounts: For distributions after December 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
  • Discharged student loan debts for reasons of death or permanent disability will be excluded from gross income.
  • Recharacterization of IRA contributions: For tax years beginning after December 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion
  • ·Rollover period extended for rollover of plan loan offset amounts. For plan loan offset amounts which are treated as distributed in tax years beginning after December 31, 2017, the period during which a qualified plan loan offset amount can be contributed to an eligible retirement plan as a rollover contribution will be extended to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs (the tax year in which the amount is treated as distributed from the plan).
  • Self-created property: Certain self-created property will no longer be treated as a capital asset. Effective for dispositions after December 31, 2017, the Act excludes patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created), from the definition of a “capital asset.”
  • Estate and gift tax: Increased exemption amount. For estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

Further changes to the tax bill are possible, but unlikely. If you have questions about how these points will affect you, please contact your trusted REM tax professional.