The Tax Cuts and Jobs Act (TJCA) is sweeping tax legislation that fundamentally changes the individual and business tax landscape.
While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.
Individual Income Tax Rates
The legislation replaces most of the seven current marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts, and replaces existing “kiddie tax” provisions (under which a child’s unearned income is taxed at his or her parents’ tax rate) by effectively taxing a child’s unearned income using the estate and trust rates.
|If taxable income is:||Then income tax equals:|
|Not over $9,525||10% of the taxable income|
|Over $9,525 but not over $38,700||$952.50 plus 12% of the excess over $9,525|
|Over $38,700 but not over $82,500||$4,453.50 plus 22% of the excess over $38,700|
|Over $82,500 but not over $157,500||$14,089.50 plus 24% of the excess over $82,500|
|Over $157,500 but not over $200,000||$32,089.50 plus 32% of the excess over $157,500|
|Over $200,000 but not over $500,000||$45,689.50 plus 35% of the excess over $200,000|
|Over $500,000||$150,689.50 plus 37% of the excess over $500,000|
|Married Individuals Filing Joint Returns|
|If taxable income is:||Then income tax equals:|
|Not over $19,050||10% of the taxable income|
|Over $19,050 but not over $77,400||$1,905 plus 12% of the excess over $19,050|
|Over $77,400 but not over $165,000||$8,907 plus 22% of the excess over $77,400|
|Over $165,000 but not over $315,000||$28,179 plus 24% of the excess over $165,000|
|Over $315,000 but not over $400,000||$64,179 plus 32% of the excess over $315,000|
|Over $400,000 but not over $600,000||$91,379 plus 35% of the excess over $400,000|
|Over $600,000||$161,379 plus 37% of the excess over $600,000|
Standard deduction (Reverts to pre-existing law after 2025)
The legislation roughly doubles existing standard deduction amounts, but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward. Additional standard deduction amount remains if you are over 65.
|Filing Status||Before Tax Cuts and Jobs Act||After Tax Cuts and Jobs Act|
|Head of Household||$9,550||$18,000|
|Married Filing Jointly||$13,000||$24,000|
The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) is repealed, and the following changes are made to individual deductions:
- State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
- Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity indebtedness – except for ‘acquisition indebtedness used to improve primary residence that secures the primary mortgage.
- Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns to 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT) for the two years as well.
- Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deducting certain cash gifts is increased from 50% to 60%.
- Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.
- Miscellaneous itemized deductions — Miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.
The new legislation eliminates the personal exemption.
|Amount||Before TCJA||After TCJA|
|Personal Exemption Amount||$4,050 per person||N/A ($0)|
Child tax credit
The child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The maximum amount of the credit that may be refunded is $1,400 per qualifying child, and the earned income threshold for refundability falls from $3,000 to $2,500 (allowing those with lower earned incomes to receive more of the refundable credit). The income level at which the credit begins to phase out is significantly increased to $400,000 for married couples filing jointly and $200,000 for all other filers. The credit will not be allowed unless a Social Security number is provided for each qualifying child.
A new $500 nonrefundable credit is available for qualifying dependents who are not qualifying children under age 17.
|Amount of Credit||Before TCJA||After TCJA|
|Maximum Credit per Qualifying Child||$1,000||$2,000|
|Nonrefundable credit for dependants who are not qualifying children||N/A||$500|
529 Plan Education Accounts
529 plan distributions can now be used tax-free for private elementary and secondary school expenses (for up to $10,000 in distributions per student each year), and includes both public, private, or religious schools. Homeschooling expenses are not eligible.
Alternative minimum tax (AMT)
The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out
Other noteworthy changes for individuals
- The Affordable Care Act individual responsibility payment (individual mandate) (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.
- In a permanent change that starts in 2018, Roth conversions cannot be reversed by recharacterizing the conversion as a traditional IRA contribution by the return due date.
- For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse, and are not included in the income of the recipient. This is also a permanent change.
- Retirement Plans – Contribution levels to retirement plans remain the same
- Capital Gains – No change to the capital gains tax rates or the ability to sell specific shares.
- Estate Tax Exclusion – The act doubles the gift and estate basic exclusion amount to $11,200,000 (per spouse) This reverts to previous amount $5,100,000 in 2025.
Noteworthy changes for Businesses or Business Owners
- Corporate tax rates – Instead of the previous graduated corporate tax structure with four rate brackets (15%, 25%, 34%, and 35%), the new legislation permanently establishes a single flat corporate rate of 21%. This provision will not expire in 2025.
- Pass-through business income deduction – Individuals who receive business income from pass-through entities (e.g., sole proprietors, partners) generally report that business income on their individual income tax returns, paying tax at individual rates. For tax years 2018 through 2025, a new deduction is available equal to 20% of qualified business income from partnerships, S corporations, and sole proprietorships. For those with taxable incomes exceeding certain thresholds, the deduction may be limited or phased out altogether, depending on two broad factors: The deduction is generally limited to the greater of 50% of the W-2 wages reported by the business, or 25% of the W-2 wages plus 2.5% of the value of qualifying depreciable property held and used by the business to produce income.
- The pass-through income deduction is phased out for certain businesses that involve the performance of services in fields including health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services. For those with taxable incomes not exceeding $157,500 ($315,000 if married filing jointly), neither of the two factors above will apply (i.e., the full deduction amount can be claimed). Those with taxable incomes between $157,500 and $207,500 (between $315,000 and $415,000 if married filing jointly) may be able to claim a partial deduction.
The information presented here does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.