Tax Reform, The Basics – Individuals

The Tax Cuts and Jobs Act is over 1,100 pages long and impacts both businesses and individuals.  Today, I am going to concentrate on the Basics as they pertain to the Individual Tax Payer.  Not to worry, though.  I will be taking a deeper dive into several provisions of the Tax Cuts and Jobs Act through out the summer, and if you are interested in particular aspects of the Act, please comment and I will go there.

As you can imagine, with over 1100 pages, this was a very long and confusing read!  Here, check it out for yourself.  https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

With so many changes, where should I start?  Well, the Tax Cuts and Jobs Act (TCJA) also known as the 2018 Tax Reform starts with tax brackets, so let’s start there.

Simply put, all across the board, tax rates are down.

Single and Married Filing Separately
2017 2018
10% 10%
Income up to $9,525 Income up to $9,525
15% 12%
Over $9,525 to $38,700 Over $9,525 to $38,700
25% 22%
Over $38,700 to $93,700 Over $38,700 to $82,500
28% 24%
Over $93,700 to $195,450 Over $82,500 to $157,500
33% 32%
Over $195,450 to $424,950 Over $157,500 to $200,000
35% 35%
Over $424,950 to $426,700 Over $200,000 to $500,000
39.60% 37%
Over $426,700 Over $500,000
Head of Household
2017 2018
10% 10%
Up to $13,600 Up to $13,600
15% 12%
Over $13,600 to $51,850 Over $13,600 to $51,800
25% 22%
Over $51,850 to $133,850 Over $51,800 to $82,500
28% 24%
Over $133,850 to $216,700 Over $82,500 to $157,500
33% 32%
Over $216,700 to $424,950 Over $157,500 to $200,000
35% 35%
Over $424,950 to $453,350 Over $200,000 to $500,000
39.60% 37%
Over $453,350 Over $500,000
Married Filing Joint & Surviving Spouses
2017 2018
10% 10%
Up to $19,050 Up to $19,050
15% 12%
Over $19,050 to $77,400 Over $19,050 to $77,400
25% 22%
Over $77,400 to $156,150 Over $77,400 to $165,000
28% 24%
Over $156,150 to $237,950 Over $165,000 to $315,000
33% 32%
Over $237,950 to $424,950 Over $315,000 to $400,000
35% 35%
Over $424,950 to $480,050 Over $400,000 to $600,000
39.60% 37%
Over $480,050 Over $600,000

I created these charts based on the information in the link provided above.  I understand that this may be confusing, so be sure to check out my Summer Blog Series which will dive deeper into tax brackets, including real world examples.  For now, understand that most everybody is in a lower tax bracket.

The next provision of the Act pertains to pass-through businesses and since I am focusing on the Individual in this blog rather than the business, I will skip past that for now.  Rest assured that I have a blog planned that will go into great detail on the 20% DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES. 

So, back to the Individual! 

I am sure you have probably heard that the standard deduction has doubled and that the personal exemption is repealed.  But what does this mean? Well, it means that a lot of people who have itemized in the past will not be doing so any longer, at least not until 2025 when these provisions are set to “sunset” or expire.  Why will a lot of people no longer be itemizing their deductions?  Well, that is because you can take EITHER the Standard Deduction OR you can Itemize your deductions and with the increased amount of the Standard Deduction, most people simply will not have enough itemized deductions to beat the Standard.

The standard deduction has almost doubled.  For Singles, this is now $12,000, up from $6350.  For Heads of Household, the amount is now $18,000, up from $9350.  For Married couples filing a joint tax return, the standard deduction is now $24,000, up from $12,700.  Not quite doubled…

This is disguised as a good thing.  And in some cases, it is.  But with the repeal of the personal exemption, it basically depends on your situation and your filing status as to if this is good or bad.   My very next blog (already written) will go into detail, giving real world examples.

More good things for families!  The Child Tax Credit has been modified in a couple of ways.  First, and most exciting, is the amount of the credit has increased from $1,000 to $2,000 per child.  There are some rules as to who can claim the Child Tax Credit, such as age and income limitations.  This credit reduces tax and once tax is reduced to zero, up to $1,400 of any remaining amount (per child) of the credit is refundable. 

There is also a NEW CREDIT for families.   We now have a nonrefundable $500 family credit for “other dependents” such as an aging parent who depends on you for care or for your child who is over 17.

Huge changes for itemized deductions! 

You’ve probably heard of the SALT limitations by now.

State And Local Tax deductions were previously basically unlimited, and here in CA, that was a very good thing.   Now, though, we are limited to a total of $10,000 deduction for all combined state and local taxes.  This includes income and property taxes.  California has among the highest taxes in the nation. CA’s base sales tax rate of 7.25% is higher than that of any other state, and its top marginal income tax rate of 13.3% is the highest state income tax rate in the country.  This means that in CA, we commonly exceed $10,000 in state and local taxes.  This is a huge deal for Californians!  More to come on this subject.

https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/CAPreliminaryReport3Provisions-Revise.pdf

More on itemized deductions!  The mortgage interest deduction has significantly changed.  Prior to 2018, you could deduct your mortgage interest up to $1Million in debt.  Now, you can only deduct the interest on the first $750,000 that you borrow.  Existing loan debt will be grandfathered in, the lower deduction applies only to loans that are taken out after December 15th, 2017.  First and second homes are still allowed, but the $750,000 limit is a combined limit.  AND home equity lines of credit are no longer a go UNLESS (yes, there is a loophole)…  Prior to 2018, you were allowed to deduct interest on home equity loans and lines of credit up to $100,000.  Beginning in 2018, this is generally no longer allowed. https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

Here is our exception.  Home equity loans and lines of credit have been traditionally used to pay all kinds of expenses, such as paying off automobile loans or credit card debt, or just spent on… Those are no longer allowed.  However, if the loan proceeds are used to build or improve your main home, the proceeds are considered acquisition debt and allowable, so go ahead and take out that loan for the new roof.  However, you are still subject to the $750,000 combined loan limitations.

You also may have heard about charitable contribution limits going up.  Prior to 2018, we were allowed to contribute and deduct up to 50% of our income.  Now we can donate and deduct up to 60% of our income.  However, most people do not come anywhere near this limit so this is all I am going to say about this.

The other really big deal on itemized deductions is in the miscellaneous itemized deductions that have been subject to what is known as the 2% Floor. 

What this means is that, in the past, the IRS has allowed us to write off certain expenses that exceed 2% of your adjusted gross income, and the amount below 2% of your AGI was just forfeit. 

These miscellaneous itemized deductions include things like unreimbursed employee business expense, tax preparation fees, union dues, home office expense, work related travel (MILEAGE!!!!), that safety deposit box you like to deduct and hobby expenses are just a few of the more common miscellaneous deductions that have been subject to the 2% floor. 

The Act has removed these deductions.  You will no longer be able to deduct mileage as an unreimbursed employee business expense.  Don’t bother tracking it. (THIS DOES NOT INCLUDE SELF EMPLOYED, these expenses are still deductible to your business.)

Alright, that’s it for today.  I am offering a withholding checkup for $75.00.  If you are a wage earner and are not sure if your employer is withholding enough in federal or state income taxes, or if you are a retiree who is concerned about withholding or estimated taxes, feel free to contact me for a withholding checkup.  (Does not apply to self-employed, schedule C or schedule E clients.  There will be a different checkup offered for small business clients soon.)

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