Tax Cuts and Jobs Act - Final Version

Happy New Year Everyone! Before the insanity of tax season sets in, it's important that I review the Tax Cuts and Jobs Act in its final form, which will affect the majority of my clientele in one form or another.  While I do feel the final version is something of an improvement over the old House and Senate versions, the new laws are hardly a simplification of our old tax code.  I've already received a lot of questions about the new laws and expect many more, and my existing clientele has also referred new business to me, as some of their friends and coworkers are confused by the new rules and consequently are looking for a tax professional for the next tax season, no longer trusting themselves with their own taxes.  At the most, the changes to the laws might result in a few of my clients no longer itemizing their deductions and perhaps a few of my higher income clientele no longer paying the Alternative Minimum Tax (AMT), and thus maybe one less form or schedule being filed with their returns.  But the simplification of our tax code, which our new President and Congress have heavily touted to garner public support for the new laws, has hardly occurred.  Whether the new laws represent a fairer tax code is for you to decide.  Here is a summary of the new laws, as they affect most people as well as a few comparisons to the old version of the laws (which were discussed in my November 17, 2017 post):

• Despite our President's pledge to simplify our different rate brackets, first originally proposing just three different tax rates and then later four rates, the number of tax rates, like the old law, remains at seven.  The lowest rate of 10% remains the same, one the next bracket, a rate of 12% replaces the old 15% rate, a rate of 22% replaces the old 25% rate, a rate of 24% replaces the old 28% rate, a rate of 32% replaces the old 33% rate, the next rate of 35% remains as before and a rate of 37% replaces the highest old rate of 39.6%.  The income brackets for each rate have also changed somewhat.  Most importantly, the first five rates now affect taxpayers with incomes of $ 200,000 or less, whereas before the first the five rates affected taxpayers with incomes of $ 416,700 or less.
• For taxpayers who itemize their deductions, the older versions of this law eliminated the state income tax deduction and limited property tax deductions to $ 10,000; the new law allows all state income and local property taxes to be deducted, but the maximum deduction is still limited to $ 10,000.
• Because our President despises it so much, the old version of the proposed law repealed the AMT; however, given the amount of potentially lost tax revenue, the new law retains the AMT, although it will not apply to as large a base of taxpayers as before.  For 2018, the larger AMT exemption will be $ 70,300 for single taxpayers and $ 109,400 for married taxpayers (versus $ 55,400 and $ 86,200, respectively, under the old system), and it will be phased out for single taxpayers with more than $ 500,000 of income and married taxpayers with more than $ 1 million of income (versus $ 123,100 and $ 164,100, respectively, under the old system).
• Taxpayers who own a home and itemize their deductions would also only be able to deduct the mortgage interest on the first $ 750,000 of their mortgage balance, versus $ 1.1 million under the old system.  The older version of the proposed law sought to limit the mortgage deduction to the first $ 500,000 of the mortgage balance, however, the National Association of Realtors and National Association of Home Builders have had at least some success with their lobbying efforts.
• The standard deductions will increase considerably in 2018, which will ultimately result in fewer people itemizing their deductions.  The deduction for single filers and those that are married but filing separately will increase from $ 6350 in 2017 to $ 12,000 in 2018, for married couples it will increase from $ 12,700 from $ 24,000, and for heads of household it will increase from $ 9350 to $ 18,000.
• Your 2017 tax return will have a $ 4050/person exemption, although this begins to phase out at higher income levels.  For 2018, there will be no more exemptions to reduce your taxable income, so the number of children and other relatives that your family supports will not impact your taxable income; however, to make up for this change, some families will be eligible for a tax credit of up to $ 2000 per child and $ 500 for other dependents (more on this later).
• One part of the old proposed law that remained the same in the newly passed law is the repeal of the moving expense deduction.  The old taxation system allowed deductions for moving expenses up to $ 5000, provided you were moving at least 50 miles to take a new job or start a new business (typically), while the new law does not allow for any moving expense deduction, except for military related moves.
• Originally, the President and Congress had proposed repealing the deduction for student loan interest, which is up to $ 2500 annually for taxpayers whether they itemize or not.  Fortunately, the final version of the law retains the deduction, with no changes from the old system.
• It appeared that our President and Congress were not very accommodating to the educational field, as the old version of the Tax Cuts and Jobs Act sought to tax the value of free tuition received by graduate students (who typically do research and teach undergraduate students for the university during the time they are working on their Masters or PhD).  Graduate students, who are already taxed on their teaching stipends, would been heavily burdened by having to pay the additional tax on their free tuition; fortunately, Congress backed off on making such a devastating change and the old system remains in effect.
• Under current law, the child tax credit is $ 1000 per child, which begins phasing out for singles whose income exceeds $ 75,000 and married couples whose income exceeds $ 110,000, completely phased out at $ 95,000 and $ 130,000, respectively.  For 2018, the child tax credit will be $ 2000 per child, and begins phasing out for singles whose income exceeds $ 200,000 and married couples whose income exceeds $ 400,000, completely phasing out at $ 240,000 and $ 440,000, respectively.  This helps make up for the $ 4050/person exemption that is being eliminated in 2018.
• To replace the $ 4050/person exemption that will be eliminated in 2018 for people who have dependents other than their own children (i.e. indigent parents and other relatives), there will be a $ 500 credit permitted.  This credit phases out under the same levels of income as the new Child Tax Credit.
• Individuals who receive self-employment income from their own business, partnership or Sub-chapter S corporation  in which they are actively involved will still pay the standard 15.3% self-employment tax on all their income (this is to cover Social Security and Medicare), but only 80% of the income will be subject to regular income taxes, which may encourage the development of new and further expansion of small businesses.
• Miscellaneous itemized deductions such as un-reimbursed job expenses, financial advisor fees and legal fees related to the production of income will also no longer be deductible on the 2018 return.  These deductions will not be missed by many of my clients, as only the portion of the deductions exceeding 2% of income are deductible and few of my clients ever meet the necessary 2% threshold to make these deductions.
• Finally, the last major change to the tax code of concern to my clientele is the repeal of the Shared Responsibility Payment for taxpayers without health insurance.  For 2017 it was up to 2.5% of income with a $ 695 minimum; taxpayers will no longer be penalized on their tax return for not having health insurance.

While I believe the final law is an improvement over the old versions of this law, it is hardly a simplification over the old tax code. This is probably the longest list of tax law changes I have written about since I began my practice.  Chances are there is at least one thing on the list that personally affects you, for better or worse.  It is estimated that these changes will reduce federal tax revenue by around $ 125 billion annually over the next ten years, and for this reason, I do not expect all of these changes to still be in place in subsequent years.  Hopefully, your tax professional can make them work best for you.