Individual Tax Planning after the Tax Cuts and Jobs Act
On 12/22/17, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The TCJA brings a host of provisions that could impact your tax situation. The changes also bring some tax planning opportunities. This summary highlights what we think are key points and planning strategies after the TCJA that will impact individual taxes. Business tax provisions and strategies will be discussed in a later tax update.
Lower Tax Rates
Thanks to the TCJA, 2018 tax rates are lower than those for 2017. Analysts have predicted that at least 80% of all individual taxpayers will get a tax cut this year. In other good news, the TCJA didn’t change the capital gains rate structure. However, higher-income individuals can still be hit with the 3.8% Net Investment Income Tax which was retained.
We are available to help you analyze your particular tax situation to determine if you will pay more or less under the TCJA. This is a good time to check estimated tax payments and the amount of federal income tax withheld from your paychecks. You can make adjustments to tax withholdings by turning in a new Form W-4 to your employer.
New Standard Deduction and Elimination of Personal Exemptions
For 2018, joint filers can enjoy a standard deduction of $24,000 (versus $12,700 for 2017). The new standard deduction for heads of household is $18,000, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,000. However, the TCJA removes the deduction for personal exemptions and increases and expands the child tax credit.
Tax Tip: Determine whether your itemized deductions, such as mortgage interest and charitable contributions, will be more or less than your standard deduction so that you can make tax informed decisions. See below for specifics.
Tax Tip: With the higher standard deduction you can employ your children at reasonable wages free of federal income tax up to $12,000 (but subject to payroll and state taxes).
Personal Tax Deductions
Home Mortgage Interest. The TCJA lowers the $1 million qualified home mortgage limit to $750,000 ($375,000 if married filing separately) and eliminates the deduction for interest on home equity debt. Thanks to a set of grandfather rules, the new limits don’t apply to home acquisition debt that was taken out on or before 12/15/17 (or taken out on or before that date and refinanced later).
Tax Tip: With the new lower limit and no deduction for home equity interest it may not make sense to pre-pay a qualified home mortgage.
Also, the IRS recently advised homeowners that interest paid on home equity loans and lines of credit may be deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. In other words, such loans will be treated as home acquisition debt subject to the new $750,000/$375,000 limits.
Tax Tip: Determine the amount of a home equity loan that was used for a home purchase or improvement. We will need this amount to determine how much interest to deduct.
Tax Tip: Consider paying off home equity debt that is no longer tax deductible.
Charitable Contributions. The TCJA increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of adjusted gross income. However, donations to colleges and universities for ticket or seat rights at sporting events are no longer deductible.
As we mentioned earlier, the standard deduction has almost doubled. Combined with the capping of the state and local tax deduction at $10,000 per year ($5,000 for a married taxpayer filing a separate return), changes to the home mortgage interest deduction, and the elimination of miscellaneous itemized deductions, it’s likely that fewer taxpayers will be itemizing in 2018.
Tax Tip: One way to combat this is to bunch or increase charitable contributions in alternating years. This may be accomplished by pre-paying some contributions or by contributing to a donor-advised fund. Donor-advised funds allow donors to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund. Taxpayers can claim the charitable tax deduction in the year they contribute to the donor-advised fund and then can schedule grants to charities out of the fund over several years.
Tax Tip: Qualified charitable distributions (QCD) can be made by individuals age 70-1/2 or older from traditional IRAs to public charities up to $100,000 a year. The IRA distribution is tax-free but there is no tax deduction for the contribution. It is not recommended to make a QCD from a Roth IRA or a nondeductible regular IRA. Be careful that no goods or services are provided in consideration for the donation or the IRA distribution will not qualify as a QCD. Note also that QCDs cannot be made from 401(k) plans, SIMPLE IRAs or SEP IRAs.
State and Local Taxes. The deduction for state and local income and property taxes is limited to $10,000 ($5,000 if married filing separately).
Tax Tip: This limit does not apply to taxes paid by businesses or to property taxes paid on rental properties.
Tax Tip: If your state and local personal taxes are already over $10,000 there is no reason to pre-pay other state and local personal taxes and there may be a tax benefit to defer payment as long as possible (e.g. if the limit is raised in a future year).
Alimony. For divorce or separation agreements entered into after 2018, alimony payments aren’t deductible. However, the receiving spouse isn’t required to include the payments in income.
Moving Expenses. The TCJA eliminates the deduction for job-related moving expenses, except for active duty military personnel.
Casualty and Theft Losses. The deduction for casualty and theft losses has been suspended. However, a deduction may be available for losses incurred in a federally declared disaster.
Miscellaneous Itemized Deductions. Unfortunately, a deduction for these items is no longer available. These included tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
Tax Tip: It is more advantageous than ever to use an accountable business expense reimbursement plan with an employer. Under these plans the reimbursements are tax-free to the employee and the employer can deduct the reimbursements.
Qualified Tuition Plans (Section 529 Education Plans)
Thanks to the TCJA, distributions from qualified tuition plans are now tax-free for tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
Tax Tip: Start funding a qualified tuition plan earlier if you expect pre-college tuition.
Qualified Business Income Deduction
There has been a lot of talk in the news about a new deduction for “pass-through” income, but it’s actually available for qualified business income from a sole proprietorship (including a farm) or rental property, as well as from pass-through entities such as partnerships, LLCs, and S corporations. Under the TCJA, individuals may deduct up to 20% of their qualified business income; however, the deduction is subject to various rules and limitations. We will provide guidance about this huge new tax deduction in later tax update.
Excess Business Loss Disallowed
An aggregate net business loss is now limited to $500,000 a year for married individuals filing jointly ($250,000 for other filers) with any excess loss carried over to the next year.
Qualified Opportunity Zones
Tucked away in the TCJA is the creation of Qualified Opportunity Zones (QO Zones). These are low-income communities that meet certain requirements. Investing in QO Zones can result in two major tax breaks: (1) temporary deferral of gain from the sale of property and (2) permanent exclusion of post-acquisition capital gains on the disposition of investments in QO Zones held for ten years. We will cover this new opportunity in our next tax update.
Other Important Provisions
Alternative Minimum Tax (AMT). The TCJA retains the AMT for individuals. There were high hopes that the AMT would be repealed. The good news is that the TCJA significantly increases the AMT exemptions and greatly increases the thresholds for when the exemptions are phased out. This means that far fewer people will have to pay the AMT.
Estate Tax. The TCJA retains the estate tax but the estate tax exemption has been increased from $5.49 million in 2017 to roughly $11.2 million in 2018 ($22.4 million for married couples).
The ACA Individual Mandate required individuals who weren’t covered by a health plan that provided at least minimum essential coverage to pay a “shared responsibility payment.” Starting in 2019, the TCJA permanently reduces the shared responsibility payment to zero.
The "kiddie tax" rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates.
Tax Tip: The child's tax is now unaffected by the parent's tax situation but the tax on the unearned income could be higher than the parent would have paid since trusts have very steep tax rates. However, a child will no longer have to extend their return if the parent extends.
State Tax Rules
North Carolina and other states' income tax rules are somewhat different than the federal rules. We are monitoring NC's response to the TCJA to help you minimize your state income tax bill as well.