What has ACTUALLY changed?
Andrew Baron, CFP®
Associate Advisor
The Tax Cuts and Jobs Act of 2017 (TCJA) was the first major shakeup in the United States tax code since The Tax Reform Act of 1986 under President Reagan. While there are significant changes to how corporations and other businesses are taxed, there are also many provisions that affect individuals and families. Between modification and elimination of tax credits and deductions, as well as adjustments to the marginal tax brackets, individual filers should anticipate a new tax landscape for the upcoming tax year
A top priority for TCJA was to simplify the tax code. Simplification was partially achieved by incentivizing taxpayers to utilize the standard deduction. Under the previous tax code around 30% of Americans itemized their tax deductions versus taking the standard deduction. However, under TCJA this percentage is expected to decrease—simplifying taxes for millions of Americans. This push toward the standard deduction is further encouraged by the loss of certain itemized deduction limits and a corresponding two-fold increase in the standard deduction amount. Other modifications include changes to the Alternative Minimum Tax (AMT) and 529 Education Savings Plans. For taxpayers subject to the AMT, the exemption amount has increased temporarily between 2018 and 2026. The AMT is a parallel tax system to ensure payers taking significant reductions in taxable income through deductions and credits contribute a minimum tax liability. 529 plans were modified to allow withdrawals to be used for K-12 education, as previously 529 plans could only be used to fund qualified higher education expenses.
Another significant update to the tax code was to the amended marginal brackets. Each of the brackets were reduced (except the bottom 10% rate) providing for an overall effective tax rate reduction for a majority of taxpayers. While initially there appear to be major revisions to the tax code, individual filers should be cognizant that many TCJA changes expire after 2025. Due to the temporary nature of these changes, taxpayers should use care when doing long-term financial planning.
| TCJA Revision for Itemized Deductions | |
| Eliminated | |
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Employee business deductions, tax preparation fees, and investment interest expenses are no longer deductible for tax year 2018 |
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Personal losses are no longer deductible for tax year 2018, excluding losses federally declared disaster areas. |
| Modified | |
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Limited to $10,000 combined limit with Real Property Tax, in lieu of State and Local Sales Tax |
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Limited to $10,000 combined limit with Real Property Tax, in lieu of State and Local Income Tax |
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Limited to $10,000 combined limit with either State and Local Sales Tax or State and Local Income Tax |
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Interest on home-equity loan is disallowed, Interest on new home purchases limited to $750k, Interest on current mortgages limited to $1MM |
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Increased ceiling amount of 60% Adjusted Gross Income up from 50% |
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Gambling losses are deductible limited to gambling gains, Losses included any deduction allowable in carrying on a wagering transaction. |
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Medical expenses are deductible given they exceed 7.5% Adjusted Gross Income for 2017-18, beginning 2019 threshold increases to 10%
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| TCJA Revision for Above-the-Line Deductions | |
| Eliminated | |
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For new orders, either the payers are unable to deduct payments or recipient must report alimony as income |
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Previous deduction expired and was not renewed |
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Eliminated by TCJA |
| Modified | |
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Moving expenses are eliminated, excluding active military for related expenses |
| No Change | |
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K-12 instructors may deduct up to $250 for classroom supplies |
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Taxpayers may deduct up to $2,500 for student loan interest paid |
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Contributions to HSA are deductible |
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Contributions to IRA are deductible |
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Self-Employment tax, health insurance, and retirement plan contributions are deductible for self-employed tax filers |
