Summary 2017 Tax Cuts and Jobs Act Changes

Most provisions are set to take effect in 2018, but many of those are also set to expire or sunset in 2025. Here’s a summary of what it means for tax rates, deductions, mortgages, and more.

1. Reductions in individual tax rates. The bill retains the current structure of seven individual tax brackets, but lowers five of them. It also includes the sunset provision, meaning it’s a temporary arrangement from 2018 to 2025.

Here’s the breakdown of the new vs. current marginal tax rates:.

2. Reduction is Corporate Tax Rates from 35% to 21% and lowers the burden on pass-through businesses. The alternative minimum tax for corporations has been eliminated. The tax burden on owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — would be lowered by a 20% deduction. The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).
3. Standard Deductions increasing nearly 90%, but personal exemption eliminated. For married couples filing jointly, the standard deduction rises to $24,000 from $12,700; for single filers, it moves to $12,000 from $6,350. The personal exemption of $4,050 for you, your spouse, and your dependents is eliminated.
4. Additional changes to Itemized Deductions.
   • Personal exemption ending, but child tax credit increasing.  The child tax credit would be doubled to $2,000 for children under 17. It also would be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.
   • Limits to state and local taxes (“SALT”). Under the bill, you may only deduct up to $10,000 in state and local taxes, including sales, income, and property taxes. This deduction was not previously subject to limitation.
   • Caps on mortgage interest. The bill allows mortgage interest deductions for current homeowners, but caps the interest deduction at $750,000 in mortgage debt for homes bought in 2018 and beyond, down from the $1 million limit in place now. It eliminates deductions for interest on home-equity loans, as well as deductions for moving expenses and employer-provided expense reimbursements (except for members of the military).
   • Expands medical deductions. Current law allows for deduction of medical expenses over 10% of adjusted gross income (AGI). The bill lowers the threshold to 7.5%.
   • Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.
   • Changes to investment advice fee and tax prep fees. Individuals will no longer be able to take an itemized deduction for investment advice expenses or tax prep expenses.

5. 529 Accounts can be used in new ways. In the past, funds invested in 529 savings accounts wasn’t taxed — but it could only be used for college expenses. Now, up to $10,000 can be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.
6. Changes to estate planning. As noted above, the bill doubles the estate tax exemption to $10 million, but it’s also indexed for inflation after 2011. The bill also calls for doubling the value threshold on the 40% levy on estates worth nearly $11 million for individuals and $22 million for couples. The estate tax exemption also has the sunset provision, meaning that the bill calls for a reversion back to current exemption amounts in 2026.
7. Fewer people will have to deal with the Alternative Minimum Tax. The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, remains in place for individuals. But fewer people will have to worry about calculating their tax liability under the AMT moving forward. The exemption has been raised to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
8. Charitable deduction decisions may change. Although the current tax deductions stay in place, the doubling of the standard deduction to $24,000 essentially raises the threshold on deductibility. Taxpayers will have to itemize donations to get the benefit.
9. Roth recharacterizations. Under current law, if you convert a traditional Individual Retirement Account (IRA) to a Roth IRA, you can later choose to do a recharacterization back to a traditional IRA. The bill takes away the recharacterization provision that allows taxpayers to unwind a conversion.
10. No switch to FIFO in the selling of securities. The FIFO provision that was part of the original Senate bill has since been removed, and some investors may be breathing a sigh of relief. Under the provision, investors wanting to sell a portion of an investment would have been required to sell the shares they’ve held the longest.
11. No changes to Coverdell Savings Accounts. Originally the bill proposed eliminating the ability to open new accounts, contribute to existing Coverdell accounts, or rollover Coverdells into 529 plans after 2017. These revisions are no longer included in the current tax reform proposal.
12. You can still deduct Student Loan Interest. Up to $2,500 per year.
13. If you’re a teacher, you can still deduct classroom supplies. Up to $250 per year.
14. Home sellers keep their tax break on profits.Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains, so long as they’re selling their primary home and have lived there for two of the past five years.
15. Alimony payments are no longer deductible. Alimony payments, which are written in divorce agreement, are no longer deductible to the person who pays them.
16. The disaster deduction has been changed.Losses sustained due to a fire, storm, shipwreck or theft that aren’t covered by insurance used to be deductible, assuming they exceeded 10% of adjusted gross income. But now through 2025, people can only claim that deduction if they’ve been affected by an official national disaster. That would make someone whose house was destroyed by a California wildfire potentially eligible for some relief, while disqualifying the victim of a random house fire.
17. The individual mandate on health insurance has been repealed. This mandate penalized people who did not have healthcare. It is being eliminated in 2019. The Congressional Budget Office has predicted that 13 million fewer people will have insurance coverage by 2027, and premiums will go up by 10% most years.
18. Kiddie Tax: Parents who save for their children in a Uniform Transfer to Minors Account (UTMA) will likely see a tax increase on investment earnings. Earnings over $2,100 are currently taxed at the parent’s tax rate, but, moving forward, earnings will be taxed at the rate used for trust funds, representing an increase for all but those in the highest tax bracket (for whom it is a wash).

We will do our best to keep you informed. We recommend contacting your tax advisor with any questions specific to your personal situation.