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; also see IRS Publication 5307 at www.irs.gov.
Federal Income Tax Brackets—For 2018 returns, 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. Those brackets replaced former brackets of 10, 15, 25, 28, 33, 35 and 39.6 percent.
The law also changed the inflation index used to adjust the brackets after 2018, from the CPI-U to the “chained” CPI-U. That measure seeks to take into account changes in consumption in response to price changes, and thus typically indicates a somewhat smaller increase. The expected result is that future brackets will rise at a slower rate.
In addition, the tax rates and brackets for the unearned income of a child changed and are no longer affected by the tax situation of the child’s parents. The 2018 tax rates applicable to a child’s unearned income of more than $2,550 are 24, 35, and 37 percent.
Personal Exemption—For 2018 returns, taxpayers can no longer claim a personal exemption deduction for themselves, a spouse or dependent. The exemption amount for 2018 otherwise would have been $4,150.
Standard Deduction—The law significantly raised the standard deduction amounts, for those who do not itemize. For 2018 returns, they are:
Married Filing Jointly and Surviving Spouse $24,000
Married Filing Separately $12,000
Head of Household $18,000
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.
The law further applied the chained CPI-U to increases in these amounts after 2018.
Itemized Deductions—For 2018 returns, 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 medical and dental expenses above 7.5 percent of adjusted gross income are deductible, down from the 10 percent in effect through 2016 (P.L. 115-97 had reduced that threshold effective with the 2017 tax year).
• 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 deductibility 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. The new limit doesn’t apply for those who had a binding contract to close on a home after December 15, 2017, and closed on or before April 1, 2018; in that case the prior limit would apply. Mortgage debt that is the result of a refinance on or before December 15, 2017, also 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 increased from 50 percent to 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 2018 returns, the alternative minimum tax exemption threshold was increased to $70,300 for single taxpayers (unmarried or head of household), $109,400 for joint returns or surviving spouses, and $54,000 for married individuals filing separately. The excess taxable income above which the 28 percent tax rate applies is $95,550 for married individuals filing separately and $191,100 for joint returns and single taxpayers (other than surviving spouses). The 2018 amounts used to determine the phase-out of the exemption amounts are $1 million for joint returns or surviving spouses, and $500,000 for single taxpayers and for married individuals filing separately. The amounts for later years will be indexed for inflation.
Child Tax Credits—The child tax credit allows taxpayers to reduce their federal income tax liability for a qualifying child. For 2018 returns, the maximum credit increased to $2,000 per qualifying child under age 17 (from $1,000) and the income threshold at which the credit begins to phase out increased to $200,000 ($400,000 if married filing jointly). The maximum additional child tax credit for taxpayers with little or no federal income tax liability increased to $1,400 (from $1,000) and the phase-out threshold was reduced to 15 percent of the family’s earnings in excess of $2,500 (from $3,000). The child must have a Social Security number issued before the due date of the 2018 return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit.
Also, a new “family credit” of up to $500 was created 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—For 2018 returns, 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.
IRA Conversions—Starting in 2018, a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans. However, a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization was made by October 15, 2018. The rules are complex; see Publication 590-A at www.irs.gov.
Estate Tax—The federal estate tax rate is 40 percent on the amount above an exemption. P.L. 115-97 increased the exemption level to $11.18 million per decedent effective with tax year 2018, up from $5.49 million in 2017. For a married couple, this is a per-spouse exclusion; when one spouse passes away, 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.
Other Provisions—P.L. 115-97 made numerous more minor adjustments to income tax policy for 2018 returns including:
• The foreign earned income exclusion is $103,900.
• The maximum earned income credit amount is $6,431 for taxpayers with three or more qualifying children. Other earned income credit amounts are detailed in Revenue Procedure 2018-18 at www.irs.gov.
• For participants who have self-only coverage in a medical savings account, the plan must have an annual deductible that is not less than $2,300, but not more than $3,450. For self-only coverage, the maximum out-of-pocket expense amount is $4,550. For participants with family coverage, the floor for the annual deductible is $4,550; however, the deductible cannot be more than $6,850. For family coverage, the out-of-pocket expense limit is $8,400.
• Eligible military service members who performed service in the Sinai Peninsula can now claim combat zone tax benefits retroactive to June 2015.
Also, alimony and separate maintenance payments will no longer be deductible for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date. Further, alimony and separate maintenance payments will no longer be included in income as of those dates.
Provisions Not Affected—P.L. 115-97 did not change two Medicare surtaxes created by the Patient Protection and Affordable Care Act, Public Law 111-148:
• The employee portion of the Medicare hospital insurance tax, normally 1.45 percent of covered wages with no limit, is increased by 0.9 percent 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.
• 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 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 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 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.
Note: P.L. 115-97 eliminated, although not until tax year 2019, the “individual shared responsibility” provision of the Affordable Care Act. See Section 2 of this chapter.
The individual maximum contribution to IRAs (traditional and Roth combined) for 2018 is $5,500 if below age 50 in that year or $6,500 if 50 or older (or total compensation for the year, if less); contributions for the 2018 tax year must be made no later than April 15, 2019. 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 $63,000 and $73,000. For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $101,000 and $121,000. 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 $189,000 and $199,000. The adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is $189,000 to $199,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $120,000 to $135,000. See www.irs.gov/retirement-plans/ira-deduction-limits.
P.L. 115-97 also did not affect prior provisions of law including that for 2018 returns:
• The annual exclusion for gifts remains $15,000; above that amount gifts are subject to the same tax as the recipient’s individual income tax.
• The monthly limitation for the qualified transportation fringe benefit was unchanged, as was the monthly limitation for qualified parking. See Public Transit Subsidies in Chapter 8, Section 4.
• The adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000.