An Overview of the Tax Cuts and Jobs Act’s Impact on Individuals

Community Manager
Community Manager
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shutterstock.jpgThis is the first of a series of articles concerning the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017.  In this article, we provide an overview of some key areas of the new Act. Be sure to watch for periodic updates where we will go into more depth on how specific features of the Act may affect you, such as: mortgages, personal income, health care, investments, college savings, and large purchases.

 

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. New tax rates for 2018 and beyond.

 

Standard deduction and personal exemptions

 

The legislation roughly doubles existing standard deduction amounts, (Single or Married Filing Separately - $12,000, Head of Household - $18,000, and Married Filing Jointly - $24,000) 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.

 

Itemized deductions

 

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limit on itemized deductions that applied to higher-income taxpayers (commonly known as the "Pease limitation") is repealed, and the following changes are made to individual deductions: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.
  • 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.

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 (subtracted from the amount you owe, but not beyond zero) is available for qualifying dependents who are not qualifying children under age 17.

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

 

  • The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.
  • Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in following years.
  • 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.

 

USAA is here to help by providing additional information and guidance on your specific financial needs and goals as we evaluate the impact of the tax bill in 2018 and beyond. We’re committed to helping you make smart financial decisions all along the way.

 

Visit USAA’s Tax Center for information and resources. You can also speak with an advisor by calling 800-531-8722.

 

The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for noncompliance are severe and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.

 

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35 Comments
Aussie41
Contributor

Did I miss the treatment of Social Security payments?

LiveGreen
New Member

Regarding interest paid on home equity loans, the IRS says in IR-2018-32, Feb. 21, 2018:

“WASHINGTON — The Internal Revenue Service today advised taxpayers that in many cases they can continue to deduct interest paid on home equity loans.”

“Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.”

 

Animas
New Member

Pass thru earnings for individuals was not discussed.  20% shielding of this income is pretty important to me.  Please detail what types of income count toward the determination of high income individuals. (IRA pmts, Roth Rollovers, interest income, or short term gains on stock sales.

Dante22
New Member

Interest on home equity loans will be deductible if the proceeds from the loan is used for improvements to the home which secures the loan.

Oscar A
Occasional Visitor

Is dividend income still excluded in 2018 if your taxable income is less than about $75,000.

Stephen8080
Contributor

Social security and Medicare tax payments have never reduced your taxable income. Look at your W-2 and then look at you return. It doesn’t reduce your income in anyway. Unless you’re self employed you get 1/2 of self employment tax as a writeoff since your paying the full 15.3% of the tax vs splitting the half with an employer while you pay other half. 

Community Manager
Community Manager

Aussie41

"Did I miss the treatment of Social Security payments?"

 

This is a good question since the taxation of Social Security benefits can be confusing. The way Social Security benefits are taxed was not changed by the new tax law, but many folks may now have a higher standard deduction that reduces their taxes. Here is an example to help explain how this might work, assuming we’re looking at the 2018 tax year:

 

  • Let’s say you use the IRS worksheet to calculate the taxable portion of your Social Security benefits, and the resulting number is $5,000. That amount is then included on your tax return (line 20b on IRS form 1040, for 2017) to calculate your total adjusted gross income (AGI), which is the total at the bottom of page one of the 1040. So, there is really no change so far in calculating your AGI.
  • Where the new tax law comes into play is on page two of the form 1040, where you apply your deductions, credits, and other taxes. For 2018 the standard deduction amount is $12,000 for unmarried and married filing separately, $18,000 for head of household, and $24,000 for married filing jointly or surviving spouse. After applying any deductions (itemized or standard), credits, other taxes, and subtracting your payments, you will end up with a taxable income figure. This amount will now be subject to tax rates under the new law.

 

I hope this helps, and for more information see the following links:

https://www.ssa.gov/planners/taxes.html

https://www.irs.gov/newsroom/are-social-security-benefits-taxable

https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable

Community Manager
Community Manager

To: LiveGreen

Thanks so much for the comment. It’s important for people to realize the new distinction regarding the deductibility of home equity loan interest. Matthew Angel had talked about this in his recent USAA Blog “Own a Home? A Must Read on How the New Tax Bill Will Impact You”. Thanks again.

Runnin' Irish
New Member

USAA (and most other financial advise sites) seem to be completely avoiding actual comparisons of 2017 vs 2018 tax law.  Why can't they pick some members (or make up some scenarios) and then run the numbers so people can actually see the bottom line difference.

 

Examples:

 - Capt and non-working spouse with 1 kid living in base housing; maxing out Roth TSP and giving 5% to their church.

 - MSgt and part-time working spouse with 2 kids and a $200K mortgage in San Antonio.

 - Lt Col and spouse with 2 kids (1 in college on Post 9-11 GI BIll) and a mortgage with some investment income from his USAA mutual funds who gives 10% to various charities.

 - Veteran going to school part time on Post 9-11 GI Bill while working part time and struggling to pay off credit card dept.

Community Manager
Community Manager

Dante22,

What you say is correct.  There are two provisions of the tax bill that can easily be confused as IRS regulations can often be.  The first concerns home mortgage interest deduction and the second is interest on home equity loans.  Let’s look at them again briefly and I recommend you speak to your tax advisor before taking any action.

 

  1. As stated by Robert Steen, an individual can deduct interest on no more than $750,000 of qualifying mortgage debt unless it was incurred prior to December 16, 2017 at which the $1M limit will continue to apply.
  2. The new law does suspend the deduction for interest on home equity indebtedness from 2018 until 2026 with just a few exceptions as you mentioned above.  If you are using the home equity line of credit (HELOC) to pay for non-home related items, your kids college education for example, it will not be deductible.  However, if you do use it to “buy, build, or substantially improve the taxpayer home that secure that loan”, you can deduct it.  However, the $750K limit still applies