General Tax Provisions
Tax Cuts and Jobs Act of 2017
Public Law 115-97, the Tax Cuts and Jobs Act of 2017 represented one of the most sweeping changes of federal tax policies in many years. Below are the provisions of the greatest general interest to individuals applying to tax returns for 2019; also see IRS Publication 5307 at www.irs.gov.
Federal Income Tax Brackets—There are seven individual income tax brackets, of 10, 12, 22, 24, 32, 35 and 37 percent. See the table below for the thresholds at which each applies.
The tax rates and brackets for the unearned income of a child are no longer affected by the tax situation of the child’s parents. The tax rates applicable to a child’s unearned income of more than $2,600 are 24, 35, and 37 percent.
Personal Exemption—Taxpayers can no longer claim a personal exemption deduction for themselves, a spouse or dependent.
Standard Deduction—The law significantly raised the standard deduction amounts, for those who do not itemize. For 2019 returns, they are:
Married Filing Jointly and Surviving Spouse $24,400
Married Filing Separately $12,000
Head of Household $18,350
The standard deduction for someone who can be claimed as a dependent on another person’s tax return is the lesser of $1,100 or the dependent’s earned income plus $350.
Note: Domestic partnerships, civil unions or other similar relationships not considered to be marriages under state law are not considered to be marriages for federal tax purposes.
Itemized Deductions—The following changes were made to deductions that can be claimed on Schedule A, for those who itemize:
• There is no longer a limit on itemized deductions; previously limits applied if adjusted gross income was above certain thresholds.
• Unreimbursed allowable medical and dental expenses above 10 percent of adjusted gross income are deductible (up from 7.5 percent in 2018).
• The deduction for state and local income, sales, and property taxes is limited to a combined total of $10,000 ($5,000 if married filing separately); previously there was no limit. No deduction is allowed for foreign real property taxes.
• Deductibility is no longer allowed for miscellaneous items that were previously deductibile so long as they were above 2 percent of adjusted gross income. These include items such as uniforms, union dues, tax preparation fees, investment management fees, employment-related educational expenses, job search expenses, hobby losses, safe deposit box fees or investment expenses from pass-through entities. Also, the deduction for non-compensated personal casualty or theft losses was ended unless associated with a disaster declared by the President. See Section 2 of this chapter regarding moving expenses.
• The deduction for home mortgage interest is limited to interest paid on the first $750,000 of home acquisition indebtedness ($375,000 if married filing separately); the prior policy was that mortgage interest was deductible on the first $1 million of combined (first and second home) acquisition debt ($500,000 if married filing separately), plus interest on $100,000 of home equity debt. Mortgage debt that is the result of a refinance on or before December 15, 2017, is exempt from the reduction to the extent that the new mortgage does not exceed the amount refinanced. No interest deduction is allowed for new or existing home equity debt.
• The limit on charitable contributions of cash to public charities or other qualifying institutions is 60 percent of adjusted gross income.
• Certain employer-provided moving expenses are no longer deductible except for members of the Armed Forces on active duty. See Section 2 of this chapter for policies related to official relocations of federal employees.
Alternative Minimum Tax—For 2019 returns, the alternative minimum tax exemption threshold is $71,700 for single taxpayers (unmarried or head of household), $111,700 for joint returns or surviving spouses, and $55,850 for married individuals filing separately. The excess taxable income above which a 28 percent tax rate applies is $97,400 for married individuals filing separately and $194,800 for joint returns and single taxpayers (other than surviving spouses). The 2019 amounts used to determine the phase-out of the exemption amounts (at the rate of 25 cents per dollar) are $1,020,600 for joint returns or surviving spouses, and $510,300 for single taxpayers and for married individuals filing separately.
Capital Gains—Long-term capital gains are taxed at 15 percent above an initial threshold and at 20 percent above a second threshold. For 2019, those thresholds are: $39,375 and $434,550 for single filers; $75,750 and $488,850 for married filing jointly; and $52,750 and $461,700 for heads of households.
Child Tax Credits—The child tax credit allows taxpayers to reduce their federal income tax liability for a qualifying child. For 2019 returns, the maximum credit is $2,000 per qualifying child under age 17 and the income threshold at which the credit begins to phase out is $200,000 ($400,000 if married filing jointly). The maximum additional child tax credit for taxpayers with little or no federal income tax liability is $1,400. The child must have a Social Security number issued before the due date of the return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit.
A family credit of up to $500 may be available for each dependent who does not qualify for the child tax credit, subject to a phase-out of the same levels as for that credit. The credit is calculated with the child tax credit in the form instructions. The total of both credits is subject to a single phase out when adjusted gross income exceeds $200,000, or $400,000 if married filing jointly.
Education Accounts—Taxpayers may withdraw up to $10,000 per year tax-free from a 529 account for a beneficiary’s K-12 education expenses in connection with enrollment or attendance at public, private, or religious elementary or secondary school, in addition to the previously allowable expenses in connection with higher education. The $10,000 cap is per student, not per 529 account.
Estate Tax—The federal estate tax rate maximum is 40 percent on the amount above an exemption, $11.4 million per decedent for 2019. For a married couple, this is a per-spouse exclusion; on the death of one spouse, the surviving spouse can claim any remaining unused amount of the deceased spouse’s exclusion. Note: Some states impose their own estate tax with exemption levels far below the federal tax exemption level.
Gift Exclusion—The 2019 exclusion for gifts is $15,000 ($155,000 for spouses); above that, gifts are subject to the same tax as the recipient’s individual income tax.
IRA Contributions—The individual maximum contribution to IRAs (traditional and Roth combined) for 2019 is $6,000 if below age 50 in that year or $7,000 if 50 or older (or total compensation for the year, if less); contributions for the 2019 tax year must be made no later than April 15, 2020. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of household who are active participants in a qualified retirement plan and have adjusted gross incomes between $64,000 and $74,000. For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $103,000 and $123,000. For an IRA contributor who is not an active participant and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $193,000 and $203,000. The adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is $193,000 to $203,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $122,000 to $137,000. See www.irs.gov/retirement-plans/ira-deduction-limits.
Separation and Divorce—Alimony and separate maintenance payments are not deductible for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before that date and modified after that date. Further, alimony and separate maintenance payments are no longer included in income.
‘Individual Shared Responsibility’—P.L. 115-97 repealed, effective with tax year 2019, the “individual shared responsibility” requirement under the Patient Protection and Affordable Care Act, P.L. 111-148, that each individual must maintain a certain level of coverage on themselves and on their dependents or else be subject to a penalty (unless eligible for certain exceptions). All FEHB plans had qualified as providing such coverage under that provision for those personally enrolled or covered under another person’s enrollment or under the spouse equity or temporary continuation of coverage provisions; federal employees and retirees not covered by the FEHB were otherwise potentially subject to the penalty through tax year 2018.
Medicare Surtax—The employee portion of the Medicare hospital insurance tax, normally 1.45 percent of covered wages with no limit, is increased under P.L. 111-148 by 0.9 percentage points on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the individual and the individual’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in the case of an individual filing as head of household.
Investment Income Surtax—P.L. 111-148 created a tax on individuals equal to 3.8 percent of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income exceeds a threshold amount. For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married individuals filing separately, it is $125,000; and for other individuals it is $200,000. For estates and trusts, the tax equals 3.8 percent of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
For this purpose, net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, non-qualified annuities, passive income from partnerships, royalties, rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.
Other Provisions—For 2019 returns:
• For participants who have self-only coverage in a medical savings account, the plan must have an annual deductible that is not less than $2,350, but not more than $3,500. For self-only coverage, the maximum out-of-pocket expense amount is $4,650. For participants with family coverage, the floor for the annual deductible is $4,650; however, the deductible cannot be more than $7,000. For family coverage, the out-of-pocket expense limit is $8,550.
• The foreign earned income exclusion is $105,900.
• The maximum earned income credit amount is $6,557 for taxpayers with three or more qualifying children.