The Tax Cuts and Jobs Act was passed by Congress this week. We highlight below the provisions that affect individual taxpayers:
1) There are still seven individual tax brackets but the rates have been lowered across all tax brackets.
2) The alternative minimum tax remains, although the exemption is increased.
3) The standard deduction is increased from $6,500 to $12,000 for individuals and $13,000 to $24,000 for married taxpayers.
4) The bill eliminates the $4,050 personal exemption per taxpayer and each dependent.
5) While the overall phase-out on itemized deductions for income levels beginning at $266,700 for single taxpayers and $320,000 for married taxpayers is repealed, there are significant modifications to itemized deductions.
- All state income and local property tax (SALT) deductions are limited to a combined total of $10,000. The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
- The mortgage interest deduction is limited to payments on $750,000 of debt, down from $1 million, for homes purchased after December 15th, 2017.
- The home equity loan interest deduction is repealed.
- The deduction for moving expenses is eliminated, except for members of the military.
- The threshold for out-of-pocket medical expenses is reduced to 7.5% of adjusted gross income, down from 10%.
- All miscellaneous itemized deductions subject to the 2% floor are repealed.
6) Individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership income. A limitation on the deduction is phased out based on W-2 wages above a threshold amount of taxable income. The deduction would also be disallowed for specified service trades or businesses with income above a threshold. Specified service trades or businesses are those in the fields of accounting, health, law, financial services or any business where the principal asset of the business is the reputation or skill of one or more of its employees. Generally, the 20% deduction is limited to 50% of the W-2 wages paid with respect to the business.