This bill contains a large number of provisions that affect most individual taxpayers which become affective on 1/1/2018. Most of the provisions affecting individuals are set to expire after 2025. At that time, if no future Congress acts to extend H.R. 1's provisions, the individual tax provisions would sunset, and the tax law would revert to its current state.
Some (but not all) of the provisions that apply to individuals include the following:
1. The new law retains seven tax brackets but modifies the "breakpoints" for the brackets and reduces the top rate to 37% from it's pre-2018 rate of 39.6%. By including more taxable income in each of the brackets the tax savings increase significantly as taxable income increases. For example, the following would be the before and after affect on a joint tax return: a) If taxable income is $19,050 there would be no change - tax would be zero. b) For taxable income of $77,400 the pre-change tax would be $10,658 and the new law (2018) tax would be $8,907, a $1,751 tax savings. c) For taxable income of $315,000 the pre-change tax would be $78,676 and the new law (2018) tax would be $64,179, a $14,497 tax savings.
2. The standard deduction for married filing jointly taxpayers increases to $24,000. The deduction for single taxpayers increases to $12,000. Head of household taxpayers increases to $18,000. The act retains the additional standard for oveer age 65 and blind taxpayers through 2025.
3. The increase in the standard deduction is also intended to compensate for the loss of the deduction for individual exemptions ($4,150 per individual for 2017). The standard deduction for someone who is a dependent of another is limited to the greater of 1) $1,050, or 2) $350 plus the individuals earned income for 2018 and this provision was not changed by the Act.
4. The child tax credit is increased to $2,000 per qualifying child from the current credit of $1,000 per qualifying child. To take this credit, the child must be under age 17 at the end of the year. It is important to emphasize that this is a "credit" and not a "tax deduction." A tax deduction reduces the amount of your income that is subject to tax, while a credit reduces your tax bill dollar-for-dollar. So if you owe the IRS say $3,500 for the year, and have a $2,000 tax credit for your one child then you pay the IRS $1,500. If your child was 17 or older you would be cutting a check for the full $3,500. As with many of the provisions though this credit phases out for higher income taxpayers but the phaseout thresholds have been raised dramatically. For instance, the credit began to disappear in 2017 for married couples who had modified adjusted gross income (MAGI) of more than $110,000 and for single filers with MAGI above $75,000. The new law does not start the phaseout for married filing jointly taxpayers until they have MAGI of $400,000 of for single taxpayers until their MAGI reaches $200,000. Once you go above the thresholds, you can still take a partial credit. The credit phaseout is $50 for every $1,000 your MAGI exceeds the lower threshold. The credit is completely phased out on a MFJ return when MAGI reaches $440,000 and on a single return when MAGI reaches $240,000. MAGI for many is the same as AGI which is the last amount on page one of your Form 1040. If you have certain deductions they are added back to AGI for the threshold calculation. Some of the deduction add back would be student loan interest deduction, half of self-employment tax, deductible IRA contributions and rental losses.
5. A new $500 nonrefundable "family credit" has been added for qualifying dependents other than qualifying children. This would include aging parents who depend on you for care or a child whose support you provide, but is 17 years old or older. This credit also phases out similar to item 4 above.
6. The new law suspends the deduction for interest on home equity indebtedness. This does not mean that all interest on home equity loans are not deductible as has been widely publicized. Home equity loans taken out where all or a portion of the proceeds were used to acquire, build, or substantially improve the primary residence that secures the loan will still be deductible. This is called "acquisition indebtedness" and continues to be fully deductible up to principal limits. The non-deductible portion of home equity indebtedness would be that portion of the loan proceeds used for other purposes like purchasing a vehicle, paying off credit cards or taking a vacation. Unfortunately the Form 1098 that is used to report interest paid for tax purposes does not track how much is interest for acquisition indebtedness (deductible) and how much is used for other purposes (non-deductible). Hopefully there will be more clarification in the next few months as to how this will be determined. As it stands now, it looks like the taxpayer will need to determine the breakdown of how much of the annual home equity loan interest is for acquisition indebtedness which will be deductible and how much is non-deductible due to the fact that the proceeds were used for other purposes.
7. Miscellaneous itemized deductions subject to 2% of the taxpayer's adjusted gross income (AGI) have been eliminated. This would include unreimbursed employee expenses, investment fees, safe deposit box rentals and investment expenses from passthrough entities.
8. Under the old law the amount of allowable itemized deductions (with the exception of medical expenses, investment interest and casualty, theft or gambling losses) were reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeded a threshold amount. The new law suspends this limitation.
9. Qualified moving expense reimbursement under the current law were excluded from an employee's gross income and from the employee's wages for employment tax purposes. The new law suspends the exclusion for employees but this exclusion is preserved for U.S. Armed Forces members and their family members.
10. Early on in the process it looked like the alternative minimum tax (AMT) would be repealed but it was not in the final version. Instead, the new law increases the AMT exemption amounts and the phase-out thresholds for individuals. The AMT exemption amount for 2018 for married taxpayers filing joint returns increases from $86,200 under current law to $109,400. The phase-out threshold increases from $164,100 to $1,000,000. For individual filers the AMT exemption amount increases from $55,400 under the current law to $70,300. The phase-out threshold increases from $123,100 to $500,000.
11. Alimony and separate maintenance payments made by the payor spouse are no longer deductible and are no longer includible in income of the payee spouse. The effective date of this provision is delayed by one year. Thus, it is effective for any divorce or separation agreement executed after 12/31/2018, and for any agreement executed before but modified after that date if the modificaition expressly provides that this new provision applies to such modification.
12. The new law contains a significant amendment to the Affordable Care Act (ACA). Under current law, a tax is imposed for any month that an individual does not have minimum essential coverage, unless the individual qualifies for an exemption. Under the new law the excise tax imposed on individuals who do not obtain minimum essential covereage will be reduced to zero starting in 2019. This is one of the few provisions of the tax bill affecting individuals that is not scheduled to expire after 2025.
The IRS experienced a hardware failure this afternoon affecting a number of tax processing systems including the ability to issue acknowledgements of tax return acceptance. The IRS at this time still anticipates no major refund disruptions and still expects that 9 out of 10 taxpayers will receive their refunds within 21 days.
My annual tax letter is going to be sent out in about a week. I will also be e-mailing tax organizers to clients who request them.
As of this morning, Saturday 3/14/2015 the Internal Revenue Service website says that Federal refunds that are being direct deposited are taking 21 days from the date the electronic file is received.