Tax Cuts and Jobs Act of 2017: Individual Income Tax Changes
The 2017 tax filing is complete and now we can turn our attention to what 2018 will have in store. This year we will have LOTS of planning and explanation in store as we prepare for the implementation of a host of new tax laws affecting both individual and business income taxes. Here are the items that we expect will impact our individual clients:
- Doubling of the standard deduction and elimination of personal exemptions – Currently about 25% of individual taxpayers itemize expenses on their tax returns. With the doubling of the standard deduction to $12,000 to Single filers and $24,000 to Married Filing Jointly filers, the number of taxpayers itemizing will drop down to less than 10% of total filers. This will eliminate the need for many taxpayers to keep track of those pesky receipts and reporting forms when tax time comes.
- Changes to rules for specific itemized deductions – State and local income taxes, which can make up a significant amount for many taxpayers, will be limited to $10,000. This includes property taxes and sales tax. This will especially impact taxpayers in states with higher income tax rates. Most miscellaneous itemized deductions that were subject to the 2% limitation will no longer be allowed. These deductions include unreimbursed employee expenses, tax preparation fees, investment management fees, professional dues, home office expenses, union and professional dues, work-related education, safety deposit boxes and legal expenses. Home mortgage interest will also be limited to debt on $750,000 (down from $1,000,000). Interest paid on home equity loans has also been disallowed. These new rules will apply to loans made after December 31, 2017.
- Child tax credit increases – The child tax credit will increase to $2,000 and taxpayers will also receive a credit of $500 for other dependent family members. The new credit will phase out for taxpayers with an adjusted gross income over $400,000, up from $110,000 previously. The refundable portion of this credit will go up to $1,400, from $1,000 previously.
- Changes to eligible expenses under Section 529 Plans – Effective January 1, 2018, you may distribute up to $10,000 out of a Section 529 College Savings Plan to pay expenses for elementary or secondary school expenses. There are no time requirements for deposits into Section 529 plans, so this is a great opportunity for taxpayers to get the 20% Indiana state income tax credit for deposits into those accounts up to $5,000.
- Alternative Minimum Tax Exemption increase – The AMT exemptions will increase to $70,300 for single taxpayers from $54,300 and $109,400 for married filing jointly taxpayers, up from $84,500.
- Affordable Care Act Individual mandate eliminated – Effective January 1, 2019, the penalty assessed to taxpayers without the required insurance coverage has been eliminated. This change will not affect the requirement for coverage in 2018.
- 20% deduction of qualified pass-through business income – generally, a taxpayer may deduct 20% of qualified business income from a partnership, S-corporation, sole proprietorship, REIT dividends, cooperative dividends, and publicly traded partnerships. (See article regarding business income tax law changes for further information.)