The Tax Cuts and Jobs Act (1) was signed into law by President Donald Trump on December 22, 2017. The act amended various provisions of the Internal Revenue Code of 1986, as amended, most of which are effective starting in 2018. One of the goals of the reform was to simplify the tax system. Proponents of the act even suggested that it would result in most Americans filing their taxes on a postcard. While some parts of the code were indeed simplified, others were made more complicated, particularly the provisions relating to businesses. Moreover, many of the provisions are scheduled to expire in 2026. So, don't count on receiving that postcard any time soon.
Individuals, Trusts, and Estates
* Tax Rates--The act maintained seven tax brackets, but with substantial changes. The brackets are now 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent, compared to 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent under prior law. (2) The new top bracket of 37 percent kicks in for single taxpayers at $500,001 and at $600,001 for married filing jointly (MFJ). (3) Before the act, the top brackets were scheduled to start at $426,701 and $480,051, respectively. (4)
Trusts and estates saw a reduction from five to four brackets--10 percent, 24 percent, 35 percent and 37 percent, rather than 15 percent, 25 percent, 28 percent, 33 percent and 39.6 percent. (5) The top bracket still applies at a very low threshold, $12,500. (6) Before the act, the threshold was scheduled to be slightly higher, $12,700. (7)
The "kiddie tax" rules have also changed. The rules prevent parents in high tax brackets from shifting income to children in lower brackets. Under prior law, if a parent was in a higher bracket than a child, the child's unearned income (generally, passive investment income) (8) over $2,100 was taxed at the parent's highest marginal tax rate. (9) Now, the child's unearned income over $2,100 will be taxed at the rates for trusts and estates. (10)
* Deductions, Exemptions, and Credits --the act increased the standard deduction from what would have been $6,500 for single taxpayers ($13,000 for MFJ) (11) to $12,000 ($24,000 for MFJ). (12) This may lead to a significant increase in the percentage of taxpayers who use the standard deduction, rather than itemizing their deductions. However, the personal exemption, which was scheduled to be $4,150 in 2018 per each taxpayer, spouse, and dependent, (13) was eliminated. (14) The combination of the foregoing changes may result in tax savings for single taxpayers and small families but will likely result in a tax increase for larger families. Trusts and estates will continue to receive a deduction in lieu of a personal exemption ($600 for estates; $300 for "simple" trusts and $100 for "complex" trusts). (15) The child tax credit has gone up from $1,000 to $2,000 per qualifying child under age 17. (16) The credit is increased by $500 for each dependent who is not a qualifying child. (17) The phase-out of the credit, which, under prior law, started at adjusted gross income (AGI) of $75,000 ($110,000 for MFJ), now does not begin until $200,000 ($400,000 for MFJ). (18) Previously, the credit was potentially refundable (it could not only reduce the tax due, but could result in, or add to, a refund) for taxpayers with earned income of at least $3,000. (19) Under the act, the refundable portion is limited to $1,400 (subject to future inflation adjustments), and the earned income threshold has been decreased to $2,500 (not indexed for inflation). (20)
Charitable contributions continue to be deductible (for those who itemize deductions), and the limit for deducting cash contributions was increased from 50 percent to 60 percent of the taxpayer's "contribution base" (AGI without regard to any net operating loss carryback). (21)
The home mortgage interest deduction will now be limited to interest on up to $750,000 of acquisition indebtedness --debts incurred in acquiring, constructing or substantially improving the taxpayer's primary residence (and one other residence)--after December 15, 2017. (22) The prior limit of $1 million will still apply to acquisition indebtedness incurred on or before December 15, 2017, and to any future refinancing up to the old debt. (23) The act eliminates the deduction for interest on home equity indebtedness (other than indebtedness used to buy, build, or substantially improve the taxpayer's home), regardless when incurred. (24) However, the limitations apply only to personal interest and, therefore, are not applicable to rental properties. (25)
The deduction for state and local income, sales and domestic property taxes (other than those related to business or investment activities) will now be limited to $10,000. (26) The limitation may result in a significant tax increase for residents of high income tax states. This has led some to speculate that there will be a mass exodus to Florida, which does not impose a state income tax; however, others believe that talk of an exodus is overblown. (27)
For individuals, the new law repeals all miscellaneous itemized deductions (MIDS), including those from pass-through entities, that are subject to the 2 percent floor. (28) Typical deductions included appraisals, tax advice and preparation fees, income production expenses, deposit losses from insolvent financial institutions, and investment management and financial consulting fees. (29) The deductions for unreimbursed employee deductions for travel, meals and entertainment, union dues, home office, job legal fees, malpractice and liability insurance premiums, professional dues and journal subscriptions, work uniforms, licenses, tools and supplies are also repealed. (30)
Generally, under prior law, the total amount of itemized deductions was reduced by 3 percent of AGI over a certain threshold amount. (31) This "pease" limitation on itemized deductions has been repealed. (32)
Since trusts and estates compute taxable income in the same...