Tax Reform For Individuals

• DOI: http://doi.org/10.1002/jcaf.22349
• Date: 01 July 2018
• Author: Caroline D. Strobel
• Published date: 01 July 2018

IRS

Tax Reform For Individuals

Caroline D. Strobel

The Tax Cuts and Jobs Act,

H.R. 1, which both houses of

Congress passed on December

20, 2017 contains a number of

provisions affecting individual

taxpayers. Unfortunately, all of

these changes affecting individ-

uals are set to expire after

2025. There is currently much

talk in Congress and from the

White House about a second

tax bill, which presumably

would make the tax cuts in this

bill permanent. If Congress

does not act before 2026, the

tax laws governing individuals

would revert to the laws in

effect in 2017. There certainly

will be tax legislation before

then and, whether or not these

provisions are extended, there

will surely be change in the

current law.

MAJOR PROVISIONS

Tax rates for individuals

have been lowered by reducing

the rates (i.e., 15% lowered to

12%) and spreading out the

brackets at the higher rates.

The new maximum rate for

individuals is now 37% which

begins for individuals at

$500,000 of taxable income. A

special bracket will apply for

certain children with unearned

income.

The standard deduction has

been increased for individual

taxpayers to $24,000 for mar-

ried taxpayers filing jointly,

$18,000 for heads of household

and $12,000 for all other indi-

viduals. The additional stan-

dard deduction for elderly and

blind taxpayers has not chan-

ged. All personal exemptions

through 2025 have been

repealed. Withholding rules

have been modified to reflect

both of these changes.

PASSTHROUGH INCOME

DEDUCTION

For tax years after 2017

and before 2026, individuals

will be allowed to deduct 20%

of “qualified business income”

from a partnership, S corpora-

tion, or sole proprietorship. A

taxpayer will also be able to

deduct 20% of qualified real

estate investment trust (REIT)

dividends, qualified cooperative

dividends, and qualified pub-

licly traded partnership income.

Special rules would apply to

specified agricultural or horti-

cultural cooperatives. A deduc-

tion is disallowed for specified

service trades, or businesses

with income above the thresh-

old. This last provision may be

modified by new tax

legislation.

“Qualified business

income”means the net amount

of qualified items of income,

gain, deduction, and loss with

respect to the qualified trade or

business of the taxpayer. These

items must be effectively con-

nected with the conduct of a

trade or business within the

United States. They do not

include specified investment-

related income, deductions, or

losses. They also do not include

an S corporation shareholder’s

reasonable compensation,

guaranteed payments, or, to

the extent provided in regula-

tions, payments to a partner

who is acting in a capacity

other than his or her capacity

as a partner.

“Specified service trades or

businesses”include any trade

or business in the fields of

accounting, health, law, con-

sulting, athletics, financial ser-

vices, brokerage services, or

any business where the princi-

pal asset of the business is the

reputation or skill of one or

more of its employees. The

exclusion from the definition of

a qualified business for speci-

fied service trades or businesses

phases out for a taxpayer with

taxable income in excess of

$157,500 or $315,000 in the

case of a joint return.

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22349

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