2017 Tax Cuts and Jobs Act

Earlier this week, we sent out the Joint Committee’s Overview of the 2017 Tax Cuts and Jobs Act, which highlighted all the significant provisions in the bill. On Friday December 22^nd, President Trump signed the bill into law.  We wanted to provide a brief review of the salient provisions impacting individuals even though there will be many implementation issues, questions, and technical corrections regarding the new law.

TAX RATES

Personal Exemptions

• Existing personal exemptions of $4,150 per person are eliminated after 2017. Child and elder care credits or deductions are increased and expanded, but subject to phase outs over certain income thresholds starting in 2018.

Itemized Deductions

Many itemized deductions have been eliminated or limited:

• Miscellaneous deductions include non-disaster declared casualty losses, professional fees for tax and other planning, unreimbursed employee business expenses, union dues, and uniforms.
• Personal state and local taxes (income and property) are being limited in total to $10,000 annually. No prepayment of 2018 tax year taxes will be allowed in 2017.
• Deductible interest on new mortgage debt is limited to the interest on only $750,000 of post 2017 debt. Pre 2018 mortgage debt was limited to $1 million. No deduction will be allowed for home equity lines and there are specific grandfather provisions.
• Charitable contributions will be limited to 60% of AGI versus 50% under the current law. Carryovers of existing contributions will be subject to the old limits.
• Medical cost deductibility has been expanded for 2017 and 2018. It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income.
• To replace what is lost, the standard deduction has been doubled to $24,000 for MFJ or $12,000 for single taxpayers.

Alternative Minimum Tax

• Alternative Minimum Tax has been retained but with an increased exemption of $109,400/$70,300 (MFJ/others). The phase out of the exemption has been increased significantly ($1 million/$500,000 (MFJ/others). This will reduce the number of taxpayers subject to the AMT going forward.

ESTATE and Transfer TAXES

• The estate and gift tax has not been eliminated. However, for the next ten years the basic exclusion amount has been doubled and will continue to be inflation adjusted ($11.2 million in 2018). In 2026, the exclusion will revert back to what it would have been under existing law. This will result in significant planning opportunities because in 2018 a couple can avoid transfer taxes with an estate under $22.4 million.
• The tax cost basis adjustment at death remains the same as under current law.

529 Plans

• The qualified use of 529 plans has been expanded to include up to $10,000 per year for K-12 education. Under current law, 529 plans can only be used for college expenses.

 Pass-THROUGH BUSINESS Deductions

• The bill provides for a 20% deduction on individual earnings from pass-through businesses such as S Corps, partnerships, LLCs, and sole-proprietors. The deduction is limited for taxpayers with taxable income exceeding $315,000 (MFJ) or $157,500 (S). In the case of individuals with pass-through earnings from certain service industries, such as lawyers, doctors, accountants, and investment managers, the ability to use this deduction is limited because the phase-out begins at lower levels of income.

ROTH Recharacterization

• You cannot unwind a Roth conversion after 2017. Make sure it is done in 2017 if the account has lost value.

Pease Limitations have been Repealed

• Reduction of itemized deductions when certain income levels have been exceeded has been repealed.

Alimony

• The deductibility and inclusion of alimony into income is being phased out.