The Tax Cuts and Jobs Act – Simplification for Individuals?

The new federal tax law, titled Tax Cuts and Jobs Act (the “Act”), signed by President Trump a month ago was partially described as a simplification. If the IRS Code is now simplified why are folks still confused on many of its provisions? What unsettles me is that I know many tax professionals are unclear on several provisions as well. The fact is, the Act is not a simplification and the political compromises to pass it resulted in exceptions and carve-outs that, if not clarified by Congress or the IRS, will require the taxpayer, or their preparer, to use judgement. That leads to court resolution. The good news is tax returns complying with the Act are not due until April 2019. Unless we get clarification on many of the Act’s provisions, 2018 tax planning will be a challenge. For many, the Act will not result in a tax cut. Without ongoing tax planning there is a real risk many taxpayers will find themselves underpaid when it’s time to file their 2018 federal returns. 

The Act itself is just over 500 pages in length. I have summaries of the Act, but they average 40 pages. So, I thought of offering my own summary of the Act in a more “simplified” manner. Below is my simplified summary of the Act as it relates only to individuals. My simplified summary is for the lay person and only addresses the significant changes affecting a broad population. Almost every provision has its “ifs, ands or buts” and my simplification is certainly not intended to be all-inclusive. It only allows you to be generally conversant on the new tax law at the next cocktail party.

And oh, everyone is different, so please contact your professional tax advisor to learn how the Act affects your specific tax situation. Here goes:

My simplified summary of the Act pertaining to individuals:

  • Income Tax Brackets – Still 7 of them, but rates are reduced, and the top four brackets are widened.
  • Capital Gains and Dividends – No significant changes
  • Standard Deductions – Approximately doubled
  • Personal Exemptions – Adios! Repealed.
  • Child Tax Credit – Generally doubled.
  • Education Expenses – Section 529 plan withdrawals are generally for “qualified higher education expenses”. Guess what? Qualified higher education now includes “an elementary or secondary public, or private, or religious school” Even good for homeschooling materials and therapies! Maximum: $10,000 tax-free withdrawals per child. I think this is awesome. Too late for me though. Start that 529 plan at birth!
  • Limit on Itemized Deductions – This prior law phaseout is suspended.
  • Home Mortgage Interest Deduction – This one confused a lot of people. Yes, there is still a deduction, but the maximum mortgage loan is $750,000. The good news is, existing loans from $750,000 to $1 million are grandfathered in. You can deduct the interest on existing loans up to $1 million if there was a binding contract on December 15, 2017. That is the cutoff date.
  • Home Equity Loan Interest Deduction – Sayonara! Deduction is repealed even for existing home equity loans.
  • State and Local Tax Deduction – If unrelated to a trade or business, that is, personal to you, your state and local (including property) tax deduction is limited to $10,000 for joint tax filers, $5,000 otherwise. There may be real planning opportunities on the property tax side if you have investment property or a home office. Contact your professional tax advisor.
  • Cash Contributions – if you have so much money that you can donate, and deduct, cash up to 50% of your adjusted gross income (old law), the Act now allows you to donate and deduct 60%.
  • Unreimbursed Medical Expenses – You can deduct, if they exceed 7.5% of adjusted gross income. The Affordable Care Act raised the threshold to 10% from 7.5%, but the Act brought it back to 7.5% regardless of age. Also, the change per the Act is only for the 2017 and 2018 tax years.
  • Alimony – No longer deductible to the payor nor includible in income to the payee. This is a revenue generator for the government since the payor is generally in a higher tax bracket.
  • Personal Casualty Loss Deduction – Can only deduct losses if they exceed 10% of adjusted gross income and attributable to Presidentially-declared disasters.  Half of my neighbor’s house went up in flames last week.  Seriously.  Bad timing.
  • Itemized Miscellaneous Deductions – Goodbye to this one too. Used to be able to deduct unreimbursed business expenses, tax advice and preparation fees, investment management fees, etc. if they exceed 2% of adjusted gross income. No more.

That’s it but, as I mentioned above, not meant to be all-inclusive. There are also provisions relating to the “kiddie tax”, moving expenses, and other items so please see your professional tax advisor for details and how the Act’s provisions affect your personal situation. Also a few points:

  • The Act generally applies to the 2018 tax year and beyond. 2017 tax returns will be based on the old law.
  • Most of the Act’s provisions relating to individual taxpayers are temporary. They are only in effect until 2025. So, as it stands right now, the old tax law provisions are only suspended. We go back to the old tax law in 2025. Who knows what will be enacted in the interim.
  • The Act is only for federal tax returns. State tax laws have not changed.

I think the above discussion emphasizes the need for individual tax planning throughout the year. Waiting until year-end may not give you enough time to take the steps necessary to minimize the amount you end up paying Uncle Sam.

Comments or corrections are very welcome. Let’s chat further at the next cocktail party!

Joe Keenan
Managing Owner
Hillhurst Wealth Management LLC

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