2017 Tax Cuts and Jobs Act - Individual Provisions

On December 22, 2017, the President signed into law the most sweeping tax changes since 1986.  The new law is known as the "Tax Cuts and Jobs Act."  We have highlighted some major provisions affecting individuals below.

• Revised income tax rates and tax brackets. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.

• Boosted standard deduction. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the previously-existing additional standard deduction for the elderly and blind. 

• Personal exemptions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is suspended—the exemption amount is reduced to zero. 

• Kiddie tax modified. For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child's ordinary income and his or her income taxed at preferential rates. 

• Floor beneath medical expense deduction lowered. For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, for all taxpayers, medical expenses may be claimed as an itemized deduction to the extent they cumulatively exceed 7.5% of adjusted gross income. In addition, the rule limiting the medical expense deduction for AMT purposes to the excess of 10% of AGI doesn't apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019.

• State and local tax deduction limited. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, itemized deductions for an individual's state or local taxes (as opposed to such taxes paid in connection with a Code Sec. 162 trade or business or in a Code Sec. 212 activity) are limited. The aggregate deduction for an individual's state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes is limited to $10,000 ($5,000 for marrieds filing separately). The deduction for foreign real property taxes is completely eliminated unless paid or accrued in carrying on a trade or business or in an activity engaged in for profit. 

• Reduction in home mortgage and home equity interest deductions. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity debt is suspended, and the deduction for home acquisition mortgage interest is limited to underlying debt of up to $750,000 ($375,000 for married taxpayers filing separately). The new lower limit doesn't apply to any acquisition debt incurred before Dec. 15, 2017. And, a taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who buys the residence before Apr. 1, 2018, is treated as incurring acquisition debt before Dec. 15, 2017.
  • Prior law's $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence debt that was incurred before Dec. 15, 2017, so long as the debt resulting from the refinancing doesn't exceed the amount of the refinanced debt. 

• Boosted charitable contribution deduction limit. For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation generally may be carried forward and deducted for up to five years, subject to the later year's ceiling.

• No charitable deduction for college athletic seating rights. For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to buy tickets or seating at an athletic event. 

• Miscellaneous itemized deduction suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there's no deduction for miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) floor. 

• “Pease” limit on itemized deductions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limit” on itemized deductions is suspended. Under this limit, the otherwise allowable amount of certain itemized deductions was reduced by 3% of the amount of a taxpayer's AGI exceeding a threshold amount; the total reduction couldn't be greater than 80% of all itemized deductions.

• Other suspensions: The following exclusions and deductions don't apply for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026:
  • The exclusion from gross income and wages for qualified bicycle commuting reimbursements.
  • The exclusion for qualified moving expense reimbursements, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. 
  • The deduction for moving expenses, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. 

• Additionally, for tax years beginning after Dec. 22, 2017, members of Congress cannot deduct living expenses when they are away from home. 

• AMT exemption amounts increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the alternative minimum tax (AMT) exemption amounts for individuals are increased to be the following amounts:
  • For joint returns and surviving spouses, $109,400.
  • For marrieds filing separately, $54,700. 
  • For single taxpayers, $70,300.
  • The above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the taxpayer's alternative minimum taxable income (AMTI) exceeds the following increased phase-out amounts:
    • For joint returns and surviving spouses, $1 million.
    • For all other taxpayers (other than estates and trusts), $500,000.

• Limited exclusion for student loans. For discharges of debt after Dec. 31, 2017 and before Jan. 1, 2026, the amount of certain student loans that are discharged on account of death or total and permanent disability of the student is excluded from gross income. 

• Child tax credit increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. Other modifications to the child tax credit are:
  • The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation).
  • A $500 nonrefundable credit is provided for certain non-child dependents.
  • The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.
  • No credit is allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's SSN. 

• New excess business loss limitation. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the excess farm loss limitation of former Code Sec. 461(j) doesn't apply, and instead a noncorporate taxpayer's “excess business loss” is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the Code Sec. 469 passive loss rules. 
  • An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation. 
  • For a partnership or S corporation, the new rule applies at the partner- or shareholder-level.

• Gambling loss limit modified. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limit on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. 

• Deduction for personal casualty & theft losses suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there's no itemized deduction for personal casualty and theft losses, except for personal casualty losses incurred in a Federally-declared disaster. However, where a taxpayer has personal casualty gains, the loss suspension doesn't apply to the extent that such loss doesn't exceed the gain.

• New deferral election for stock grants of startups. Generally effective for stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017, a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by a qualified employer. The election applies only for income tax purposes; the application of FICA and FUTA is not affected. If the election is made, the income has to be included in the employee's income for the tax year that includes the earliest of five events, one of which is the first date on which any stock of the employer becomes readily tradable on an established securities market.
  • The new election applies for qualified stock of an eligible corporation. A corporation is treated as eligible for a tax year if: (1) no stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and (2) the corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation in the US (or any US possession) are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock. 
  • Detailed employer notice, withholding, and reporting requirements apply with regard to the election. 

• ABLE account liberalizations. Effective for tax years beginning after Dec. 22, 2017, and before Jan. 1, 2026, after the overall limitation on contributions to ABLE accounts is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual's compensation for the tax year. Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account. 
  • For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

• Expanded use of Sec. 529 accounts. For distributions after Dec. 31, 2017, “qualified higher education expenses” for purposes of the Code Sec. 529 rules, include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. 

• Limitation on recharacterizations. For tax years beginning after Dec. 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. 

• Liberalized rules for awards to volunteers. For tax years beginning after Dec. 31, 2017, the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service, is increased from $3,000 to $6,000. 

• Extended rollover period for plan loan offset amounts. For plan loan offset amounts which are treated as distributed in tax years beginning after Dec. 31, 2017, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs—that is, the tax year in which the amount is treated as distributed from the plan. A qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee's separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. A loan offset amount is the amount by which an employee's account balance under the plan is reduced to repay a loan from the plan. 

• Estate & gift tax exemption increased. For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

• New holding period requirement for carried interest. Effective for tax years beginning after Dec. 31, 2017, there's a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer's gain will be treated as short-term gain taxed at ordinary income rates. 

• Capital asset treatment barred for certain self-created property. Effective for dispositions after Dec. 31, 2017, the definition of a “capital asset” does not include patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created). 

• Like-kind exchange limitation. Generally effective for transfers after Dec. 31, 2017, gain on like-kind exchanges is deferred only with respect to real property that is not held primarily for sale. However, under a transition rule, the prior-law like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017. 

• Broadened incentives for Qualified Opportunity Zone investment. Effective on Dec. 22, 2017, a new rule provides temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund. 

• Deductions for net disaster losses. For any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, an individual's standard deduction is increased by the net disaster loss. Additionally, if any individual has a net disaster loss for any tax year beginning after Dec. 31, 2017 and before Jan. 1, 2026, the AMT adjustment for the standard deduction doesn't apply to the increase in the standard deduction that is attributable to the net disaster loss. 
  • A net disaster loss is the excess of (i) qualified disaster-related personal casualty losses, over (ii) personal casualty gains. “Qualified disaster-related personal casualty losses” are those described in Code Sec. 165(c)(3) that arise in a 2016 disaster area, namely any area with respect to which a major disaster was declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016. 

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA