August 3, 2018

New Tax Cuts and Jobs Act: An Individual Perspective

by John Schuman, Budros, Ruhlin & Roe

Over the past year, there has been speculation about how to improve corporate tax rates, simplify individual tax filings, provide a middle-class tax cut, encourage reinvestment in the US and so forth. It appears that the Republican Congress has finally agreed on how to address these issues. Congress officially passed the Tax Cuts and Jobs Act on Dec. 18 and it was signed into law shortly after. Things really didn’t change that much.

The Act has seven new tax brackets effective Jan. 1 with the top rate at 37 percent. The new tax rates create a lower tax at most income levels compared to the 2017 tax rates. The Act eliminated many itemized deductions and doubled the Standard Deduction to $24,000 for couples. This interplay will cause more taxpayers to take the standard deduction and not itemize. Being forced to take the standard deduction could cause the loss of any tax benefit for itemized deductions.

The deduction for all state and local income taxes and property taxes is limited to a combined amount of $10,000. Many advisers recommended prepaying real estate taxes, but that can’t be done with state and local income taxes. The Act includes an anti-abuse provision which disallows deductions in 2017 for state and local income tax payments made in 2017 which are applied to a 2018 state or local income tax liability.

Unreimbursed Medical Expenses deduction was improved under the Act. The income threshold to deduct medical expenses was lowered to 7.5 percent. Putting more medical expenses into this year and next year are advantageous. Additionally, the gift tax was retained as is. Charitable Deductions were also retained and the limitation on deductibility was raised from 50 percent to 60 percent of your adjusted gross income.

The Act limits the cap on mortgage interest deductibility to the first $750,000 of acquisition indebtedness but it grandfathers the old $1M cap for mortgages taken out prior to Dec. 15. All miscellaneous itemized deductions are repealed and no longer allowed.

AMT was retained under the Act, but the exemption was increased and the phaseout of the exemption occurs at higher income levels ($1M for married taxpayers). 529 accounts can be utilized on a tax-free basis to pay for private schooling expenses up to $10,000 per year, per student. The provision allowing 529s for homeschooling expenses was removed.

The Estate Tax Exemption increased, doubling the lifetime exemption amount of $5.6M to $11.2M. Because each spouse’s exemption is portable and can be transferred to a surviving spouse, a couple can now pass $22.4M at death without any estate tax.

I wouldn’t call this significant tax reform or simplification. We have the same number of rates, many of the same deductions, AMT and many other provisions that were retained. The significant changes came on the business tax side; I would argue that those aren’t very simple, either. This legislation is not permanent and generally sunsets in 2025. This is likely not the last word on tax legislation for individuals.