Tax Reform - A Brief Summary

The Tax Cuts and Jobs Act legislation that was signed into law will change the way many individuals prepare their income tax returns for the 2018 tax year.  To begin with, it is estimated that nearly 70% of people who currently itemize their deductions will take the standard deduction going forward.  This is primarily due to two big changes:

(1)    The standard deduction nearly doubles to $12,000 for the Single and Married Filing Separate statuses and $24,000 for those Married Filing Jointly.  For many people this will be greater than the sum of their itemized deductions.

(2)    The deduction for state and local taxes paid, including taxes paid for real estate, will be capped at a total of $10,000.  (This cap only applies to an individual’s itemized deductions.  There is no cap for state, local, and real estate taxes paid in the course of conducting a business or a rental activity.)  

Mortgage interest will continue to be deductible for up to $750,000 of acquisition debt for residences purchased after December 15, 2017.  This applies to both primary and second homes with the limit applying to their combined total.  Beginning in 2018 you can no longer deduct interest paid on a Home Equity Line of Credit.  Additionally, the deductions for tax preparation fees and investment fees have also been eliminated.

One change that will apply to both the 2017 and 2018 tax years will be the threshold to deduct medical expenses has been lowered to 7.5% of adjusted gross income for all taxpayers.  Any amounts spent on medical expenses over that threshold is deductible on a taxpayer’s Schedule A.  In 2019 it will revert back to the 10% of adjusted gross income for taxpayers under age 65 and 7.5% for those 65 and older.

Although most people will now be taking the standard deduction, there can still be a way for some retirees to get an additional deduction for charitable contributions.  Individuals age 70 ½ and older can distribute otherwise taxable IRA amounts, up to $100,000 per person per year, directly to certain tax-exempt charities through a qualified charitable distribution.  It is important to note that this distribution must go directly from the IRA to the charity without ever being received by the taxpayer themselves.  Since these individuals are subject to required minimum distributions, tax-free treatment for a qualified charitable distribution equates to an immediate 100% above-the-line deduction regardless of whether that person itemizes or not.

Tax rates on long-term capital gains and qualified dividends do not change, although they no longer follow the tax brackets.  Congress decided to set income thresholds instead. 

Single Filers: If taxable income is less than $38,600, the capital gains and qualified dividends tax rate is 0%; if taxable income is at least $38,600 but less than $425,800, the rate is 15%; and if taxable income is over $425,800 the rate is 20%. 

For Married Filing Jointly: If taxable income is less than $77,200, the capital gains and qualified dividends tax rate is 0%; if taxable income is at least $77,200 but less than $479,000, the rate is 15%; and if taxable income is over $479,000 the rate is 20%.

The 3.8% surtax on net investment income still applies for single filers with modified adjusted gross income over $200,000 and joint filers with modified adjusted gross income over $250,000. 

Comparison of the 2017 and 2018 tax brackets:

                                    2017                                                             2018

Taxable Income                       Tax Rate                       Taxable Income                          Tax Rate

Single:                                                                           Single:

$0 - $9,325                               10%                              $0-$9,525                                    10%

$9,326 - $37,950                      15%                              $9,526 - $38,700                         12%

$37,951 - $91,900                    25%                              $38,701 - $82,500                       22%

$91,901 - $191,650                  28%                              $82,501 - $157,500                     24%

$191,651 - $416,700                33%                              $157,501 - $200,000                   32%

$416,701 - $418,400                35%                              $200,001 - $500,000                   35%

 > $418,400                              39.6%                            > $500,000                                   37% 

Married Filing Jointly:                                                   Married Filing Jointly:

$0 - $18,650                             10%                             $0 - $19,050                                  10%

$18,651 - $75,900                    15%                             $19,051 - $77,400                         12%

$75,901 - $153,100                  25%                             $77,401 - $165,000                       22%

$153,101 - $233,350                28%                             $165.001 - $315,000                     24%

$233,351 - $416,700                33%                             $315,001 - $400,000                     32%

$416,701 - $470,700                35%                             $400,001 - $600,000                     35%

 > $470,700                              39.6%                           > $600,000                                     37%