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Summary of Tax Reform for Individual Taxpayers

This summary is an excerpt from “Understanding the Tax Cuts and Jobs Act”by Samuel A. Donaldson, Georgia State University College of Law, January 3, 2018.

Individual Ordinary Income Tax Brackets

Originally, Republican leadership sought to reduce both the number of individual income tax brackets and the tax rates. Under prior law, seven tax brackets ranging from 10% to 39.6% applied to an individual taxpayer’s ordinary income. The Blueprint for Tax Reform pushed for three brackets of 12%, 25%, and 33%. But by the time of the Unified Framework, that position changed to brackets of 12%, 25%, and 35%, with the possible retention of the 39.6% bracket.

Ultimately, the Act preserved the seven-bracket regime, though it reduced the rates in the top six brackets and widened the sizes of the top four brackets. The Joint Committee on Taxation estimates the ten-year cost of reducing the individual income tax brackets to be $1.21 trillion. Estimated Budget Effects of the Conference Agreement for H.R. 1, The “Tax Cuts and Jobs Act” (December 17, 2017) (hereafter, “Estimated Budget”) at 1. The Act also cut the number of tax brackets applicable to trusts and estates from five to four, but it retained the super-thin lower brackets. The following chart offers a visual comparison of pre- and post-Act tax brackets for 2018:

Federal Income Tax Brackets for Individuals, Estates, and Trusts – ORDINARY INCOME

PRE-TAX CUTS AND JOBS ACT*

POST-TAX CUTS AND JOBS ACT (THROUGH 2025)

2018 Taxable Income Exceeding

2018 Taxable Income Exceeding

Single

Married

Trusts and Estates

Rate

Single

Married

Trusts and Estates

Rate

$0

$0

10%

$0

$0

$0

10%

$9,525

$19,050

$0

15%

$9,525

$19,050

12%

$38,700

$77,400

$2,600

25%

$38,700

$77,400

22%

$93,700

$156,150

$6,100

28%

$82,500

$165,000

$2,550

24%

$195,450

$237,950

$9,300

33%

$157,500

$315,000

32%

$424,950

$424,950

35%

$200,000

$400,000

$9,150

35%

$426,700

$480,050

$12,700

39.6%

$500,000

$600,000

$12,500

37%

* From Revenue Procedure 2017-58, issued October 19, 2017.

Individual Adjusted Net Capital Gain and Dividend Income Tax Brackets

Neither the House bill nor the Senate bill intended any changes to the federal taxation of adjusted net capital gain or qualified dividend income. Thus, the three brackets for capital gain and dividend income (0%, 15%, and 20%) remain. Curiously, however, the Act makes very slight modifications to the bracket ceilings, as the following chart indicates:

Federal Income Tax Brackets for Individuals, Estates, & Trusts – CAPITAL GAINS & DIVIDENDS

PRE-TAX CUTS AND JOBS ACT*

POST-TAX CUTS AND JOBS ACT (THROUGH 2025)

2018 Taxable Income Exceeding

2018 Taxable Income Exceeding

Single

Married

Trusts and Estates

Cap Gain Rate

Single

Married

Trusts and Estates

Cap Gain Rate

$0

$0

$0

0%

$0

$0

$0

0%

$38,700

$77,400

$2,600

15%

$38,600

$77,200

$2,600

15%

AGI >

$200,000

AGI >

$250,000

18.8%

AGI >

$200,000

AGI >

$250,000

18.8%

$426,700

$480,050

$12,700

23.8%

$425,800

$479,000

$12,700

23.8%

* From Revenue Procedure 2017-58, issued October 19, 2017.

The chart also shows that the Act made no changes to §1411, the 3.8-percent surcharge on net investment income applicable to individuals with adjusted gross incomes above a stated (and still fixed) threshold and to estates and trusts in the highest tax bracket.

Zero-Bracket Provisions: Standard Deduction, Child Tax Credit, and Personal Exemptions

Prior law achieved a so-called “zero-bracket” through the trinity of the standard deduction, the deduction for personal and dependency exemptions, and the child tax credit. In an effort to simplify this regime, the Act repeals the deduction for personal and dependency exemptions and embiggens both the standard deduction and the child tax credit. All of the modifications set forth here expire at the end of 2025.

Standard Deduction. The Act substantially increases the amount of the standard deduction, as shown in the following table:

2018 Standard Deduction Pre-Tax Cuts and Jobs Act

Filing Status

2018 Standard Deduction Post-Tax Cuts and Jobs Act

$13,000

Married Filing Jointly

$24,000

$9,550

Head of Household

$18,000

$6,500

Unmarried

$12,000

$6,500

Married Filing Separately

$12,000

The Act makes no changes to the inflation-adjusted additional standard deduction amount available to blind taxpayers and those age 65 and over. Thus, for 2018, the additional standard deduction amount for “the aged or the blind” is $1,300, or $1,600 if the taxpayer is also unmarried and not a surviving spouse. The estimated foregone revenue over a ten-year period attributable to the increased standard deduction is $720.4 billion. Estimated Budget at 1.

Child Tax Credit. The Act generally doubles the amount of the child tax credit and even adds a temporary (smaller) credit for dependents that are not qualifying children of the taxpayer. It also makes the credit more available to upper-middle-class taxpayers by increasing the thresholds before the phaseout begins. It also increases the refundable portion of the credit. The following table summarizes these changes:

Child Credit Feature

Pre-Tax Cuts and Jobs Act

Post-Tax Cuts and Jobs Act

Credit Amount

$1,000 per child

$2,000 per child

$500 per other dependent

Phaseout Begins When AGI Exceeds…

Unmarried & Head of House Joint Filers

$75,000

$110,000

$200,000

$400,000

Phaseout Complete When AGI Hits…

Unmarried & Head of House Joint Filers

$95,000

$130,000

$240,000

$440,000

Refundable Portion

15% of earned income in excess of $3,000

15% of earned income in excess of $2,500, not to exceed $1,400 per child (as adjusted for inflation)

The estimated revenue loss from modifying the amount of the child tax credit is $573.4 billion over ten years. Estimated Budget at 1. The Act also provides that in order to claim the credit for a qualifying child, the taxpayer must include the child’s social security number on the return.

That provision is estimated to generate $29.8 billion in revenue over ten years. Estimated Budget at 1.

Personal and Dependency Exemptions. Under prior law, a taxpayer could claim a personal exemption deduction of $2,000, though this amount was adjusted for inflation (the 2018 inflation-adjusted exemption was set to be $4,150). Married coupled filing jointly could claim two exemptions. In addition, a taxpayer could claim an exemption deduction for each of the taxpayer’s dependents, generally defined as either “qualifying children” or “qualifying relatives.” Thus, for example, a married couple with two qualifying children could claim four personal exemptions on their joint return, a total deduction that would have been $16,600 in 2018. But if the couple’s adjusted gross income exceeded an inflation-adjusted threshold amount (what was to be $320,000 in 2018), the amount of the deduction would be gradually reduced (reaching zero if the couple’s 2018 adjusted gross income was $442,000 or more).

The Act effectively repeals the deduction for personal and dependency exemptions for the years 2018 through 2025 by reducing the exemption amount in those years to zero. The Act expressly retains the regular personal exemption for so-called “qualified disability trusts,” and the nominal personal exemptions currently in play for estates ($600) and trusts ($100 or $300, depending on whether the trust is required to distribute its income) also survive. The Joint Committee on Taxation projects that repealing the personal exemptions will generate over $1.21 trillion in revenue between 2018 and 2026. Estimated Budget at 1.

Tax Treatment of Education Expenses

Section 529 Plan Withdrawals for Elementary and Secondary Schooling: Distributions from “qualified tuition programs” (more popularly, “§529 plans”) are not included in gross income if used to pay for “qualified higher education expenses.” The Act now defines “qualified higher education expenses” to include tuition expenses at “an elementary or secondary public, private, or religious school” and even expenses for materials and therapies in connection with homeschooling. Importantly, the maximum amount that may be distributed tax-free for elementary and secondary school tuition or for homeschooling expenses is $10,000 per child (not $10,000 per account); distributions in excess of that amount will be taxable under the normal rules of §529. The projected revenue cost of this measure is $500 million over ten years. Estimated Budget at 3.

Exclusion for Discharge of Student Loan Debt at Death: New §108(f)(5) generally excludes from gross income the cancellation of a student loan on account of the student’s death or total disability if such cancellation occurs after 2017 and before 2026. The new provision is expected to cost about $100 million in foregone revenue over ten years. Estimated Budget at 3.

New Rollovers Between §529 Plans and ABLE Accounts: The Act permits amounts from qualified tuition plans to be rolled over to an ABLE account without penalty, so long as the ABLE account is owned either by the qualified tuition plan’s designated beneficiary or his or her spouse, descendant, sibling, ancestor, stepparent, niece, nephew, aunt, uncle, first cousin, or

in-law. Any amounts rolled over from a qualified tuition plan count toward the overall limit on amounts that can be contributed annually to an ABLE account. Any rolled-over amount in excess of the contribution limit will be treated as ordinary income to the distributee. Such penalty-free rollovers will be in effect through 2025. The estimated revenue loss from this new rule is expected to be less than $50 million. Estimated Budget at 3. For more on the contribution limit and ABLE accounts generally, see the material below under “Other Individual Income Tax Items of Note.”

New Excise Tax on Certain Private Colleges and Universities: Although this particular reform does not directly affect individuals, it affects college education and is thus included here.

Starting in 2018, private colleges and universities may pay an excise tax equal to 1.4 percent of the school’s net investment income, but the excise tax only applies to tax-exempt private schools with: (1) at least 500 tuition-paying full-time equivalent students (more than half of whom are located in the United State); and (2) aggregate endowments of at least $500,000 per student. The expected revenue gain from this new tax is $1.8 billion over ten years. Estimated Budget at 5. The Act asks the Treasury to issue regulations describing which assets are used directly in carrying out the school’s exempt purpose and thus are exempt from the tax.

Regulations are also to explain the computation of net investment income, though the statute says generally that rules relating to the net investment income of a private foundation will apply for this purpose.

Reform of Other Exclusions and Deductions Applicable to Individuals

Overall Limit on Itemized Deductions Suspended: Section 68 generally reduces the amount of otherwise allowable itemized deductions once a taxpayer’s adjusted gross income exceeds a certain inflation-adjusted threshold. (That threshold, for example, was set to be $320,000 for married couples and $266,700 for unmarried individuals in 2018.) For taxpayers with very high adjusted gross incomes, up to 80 percent of itemized deductions could be lost under this rule. Through new §68(f), the Act suspends the application of this phaseout for the years 2018 through 2025.

Home Mortgage Interest Deduction Modified: Under prior law, a taxpayer could deduct “qualified residence interest,” generally defined as the interest paid on either “acquisition indebtedness” or “home equity indebtedness.” Acquisition indebtedness is debt incurred to buy, build, or improve either the taxpayer’s principal residence or one other residence selected by the taxpayer (a taxpayer thus cannot have acquisition debt on three or more homes), provided the subject home secures the debt. Home equity indebtedness is any other debt secured by the residence, regardless of how the loan proceeds are used by the taxpayer. Prior law limited the amount of acquisition indebtedness to $1 million (half that amount for a married individual filing separately) and the amount of home equity debt to $100,000. Thus, for example, if an unmarried taxpayer borrowed $1.5 million to purchase the taxpayer’s only home and gave the lender a mortgage on the home, the taxpayer could deduct 11/15 of the interest paid to the lender ($1 million of the $1.5 million loan is acquisition debt and another $100,000 of the loan qualified as home equity debt).

For 2018 through 2025, the Act limits the amount of acquisition debt to $750,000 ($375,000 for a married individual filing separately) and suspends entirely any deduction for home equity debt. In the above example, then, the taxpayer can only deduct half of the interest paid to the lender ($750,000 of the $1.5 million loan is acquisition debt and none of it qualifies as home equity debt).

Importantly, the new limit on acquisition debt only applies to debt incurred after December 15, 2017; preexisting acquisition debt is subject to the original $1 million cap. The Act also applies

the $1 million acquisition debt cap to taxpayers who made a binding contract before December 15, 2017, to close on the purchase of a principal residence before 2018 and who actually purchase such residence by the end of March, 2018. There is no similar exception for home equity debt—the deduction for interest on home equity debt is suspended regardless of when such debt was incurred.

Deduction for State and Local Taxes Unrelated to a Business Modified: Prior law allowed a taxpayer to deduct state and local property tax as well as either state and local income or sales taxes (as well as foreign real property taxes) without limitation. For example, if a taxpayer in 2017 paid local real property tax of $5,000 in connection with the taxpayer’s personal residence, state income tax of $10,000, and state sales tax of $13,000 on personal costs, the taxpayer can deduct a total of $18,000 (the $5,000 in real property tax and the sales tax of $13,000, since that amount is larger than the $10,000 of state income tax).

For 2018 through 2025, the Act limits the total deduction a taxpayer can claim for state and local taxes unrelated to the taxpayer’s trade or business or other profit-seeking activity to

$10,000, and the deduction for foreign real property taxes on property unrelated to a business or investment activity is repealed entirely. In the example above, then, if the same taxes were paid in 2018 the total deduction would be limited to $10,000. If, on the other hand, the real property taxes were paid in connection with investment property, the total deduction would be

$15,000 ($10,000 in state income or sales tax plus the $5,000 in real property taxes since the real property taxes are incurred in connection with a profit-seeking activity).

The $10,000 limit on personal state and local taxes is reduced to $5,000 in the case of a married individual filing a separate return. It seems odd that the limit is the same for joint filers and unmarried individuals (whether filing as head of household or not), but the separate figure for married individuals filing separately clearly signals this is the case.

Deduction for Charitable Contributions Modified: The Act increases the deduction limit for cash contributions to charitable organizations. Under prior law, a taxpayer could not deduct more than 50 percent of the taxpayer’s “contribution base” (in most cases, an amount equal to the taxpayer’s adjusted gross income) for cash contributions. Thus, for example, if a taxpayer donated $100,000 cash to a qualified charitable organization in a year in which the taxpayer’s contribution base was $150,000, the taxpayer could deduct only $75,000 of the contribution in the year of donation. The remaining $25,000 would carry over to the next year as though the cash contribution was made in that year.

Under the Act, §170(b)(1)(G) now provides that for cash donations made from January 1, 2018, through December 31, 2025, the applicable limit is 60 percent of the donor’s contribution base. In the prior example, then, the taxpayer could deduct $90,000 of the $100,000 cash

contribution under the new rule, with only $10,000 carrying over to the next year. Further, cash contributions are deemed to happen before all other contributions, maximizing the chance of their deduction.

The Act also repeals the deduction for 80 percent of payments to an institution of higher education in exchange for the right to purchase seats at athletic events. Accordingly, such payments are deductible only to the extent the amount paid exceeds the value of the consideration received (the season tickets).

Finally, the Act repeals §170(f)(8)(D), which permitted an exception to the requirement that a taxpayer receive a contemporaneous written acknowledgement from the charity in order to claim a charitable contribution deduction in some cases. The exception contemplated that the Service would promulgate a form by which a charity could provide a substitute for the written acknowledgement, but the Service never did so. (Well, it issued proposed regulations in October of 2015 that it promptly withdrew in January of 2016.) In a couple of Tax Court cases from 2017, taxpayers learned that until Treasury produced such a form, the exception was dormant. Apparently, Congress held little hope that a form would ever be forthcoming, so it simply killed the exception.

The Joint Committee on Taxation estimates the cumulative revenue gain from repealing the overall limit on itemized deductions, limiting the home mortgage interest deduction, limiting the deduction of state and local taxes, and reforming the charitable contribution deduction will be over $668.4 billion between 2018 and 2026. Estimated Budget at 2.

Deduction for Medical Expenses Modified: Prior to 2013, individuals could deduct unreimbursed medical expenses to the extent they exceeded 7.5 percent of adjusted gross income. Part of the Patient Protection and Affordable Care Act increased the deduction threshold from 7.5 percent of adjusted gross income to 10 percent of adjusted gross income, but the 7.5-percent threshold still applied to taxpayers age 65 and over through 2016. For alternative minimum tax purposes, however, all taxpayers were subject to the 10 percent threshold as of 2013.

While the House bill originally called for the complete repeal of the deduction for medical expenses, the Senate version both saved the deduction and made it more attractive. Under the Act, the threshold for deducting medical expenses is 7.5 percent of adjusted gross income for all taxpayers, regardless of age. But this new rule (actually, a return to the old rule) applies for 2017 and 2018 only. Still, the Joint Committee on Taxation expects that Congress will lose $5.2 billion in revenue over this two-year period. Estimated Budget at 2. The Act also provides that the medical expense deduction threshold for alternative minimum tax purposes during these years is also 7.5 percent.

Deduction for (and Inclusion of) Alimony Payments Repealed: Prior law provided that the recipient of certain “alimony” payments had to include those payments in gross income. Likewise, individuals making those payments could deduct them in determining adjusted gross income. The Act permanently repeals the deduction for alimony payments and likewise repeals the rules related to inclusion of such payments in gross income, effective for any divorce or separation instrument executed after 2018 or for any divorce or separation instrument modified after 2018 where the modification expressly provides that the new law is to apply.

In effect, then, we return to the pre-statute common law, which provided that payments between ex-spouses were neither income to the recipient nor deductible by the payor. In most cases, not surprisingly, the payor of alimony is in a higher tax bracket than the payee. Repealing both the deduction and the inclusion requirement is thus not revenue-neutral; the new regime is expected to generate $6.9 billion in additional revenue over the next ten years. Estimated Budget at 3.

Deduction for Personal Casualty and Theft Losses Limited: Prior law permitted individuals to deduct losses unrelated to a business or investment activity when such losses arose from fire, storm, shipwreck, or other casualty, or from theft, but only to the extent any such loss exceeded $100 and only to the extent the net personal casualty loss for the year exceeded 10 percent of an individual’s adjusted gross income. Under the Act, such losses are deductible in 2018 through 2025 only if they are attributable to Presidentially-declared disasters under §401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

Deduction for Moving Expenses Suspended: Subject to certain requirements related to the distance moved and the amount of work time spent at the new location, §217 generally permits a deduction for moving expenses (costs of moving household goods plus traveling expenses except meals) paid or incurred during the taxable year in connection with starting work as an employee or as a self-employed individual at a new principal place of work. New §217(k) suspends the deduction from 2018 through 2025, except in the case of members of the United States Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. The measure is expected to add $7.6 billion in revenue during the suspension period. Estimated Budget at 2.

Suspension of Miscellaneous Itemized Deductions: Prior law allowed an individual to deduct “miscellaneous itemized deductions” to the extent that they, in the aggregate, exceeded 2 percent of the individual’s adjusted gross income. Section 67 defines a “miscellaneous itemized deduction” as any itemized deduction other than one listed in §67(b). Common examples of miscellaneous itemized deductions include safe deposit box rentals for storing investment assets, net hobby expenses, fees paid for appraisals in connection with casualty loss and charitable contribution deductions, fees paid to accountants and attorneys for tax advice and tax return preparation, and the unreimbursed business expenses of an employee. New §67(g) suspends any deduction for miscellaneous itemized deductions for 2018 through 2025. The Act makes no change to the above-the-line deduction of up to $250 for unreimbursed expenses paid by an elementary or secondary school educator.

Exclusion for Qualified Bicycle Commuting Reimbursements Suspended: Section 132(f)(1)(D) allows an employee to exclude from gross income any “qualified bicycle commuting reimbursement,” defined generally in §132(f)(5)(F)(i) as a reimbursement paid to an employee to cover reasonable expenses “for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.” The exclusion is limited to $20 per “qualified bicycle commuting month,” defined generally as a month in which the employee uses the bike for a substantial

portion of the commute to and from work and during which the employee receives no other qualified transportation fringe. The Act, through new §132(f)(8), suspends the exclusion for qualified bicycle commuting reimbursements from 2018 through 2025. To the surprise of none, the measure is not expected to generate more than $50 million in revenue during the period of the suspension. Estimated Budget at 2.

Other Individual Income Tax Items of Note

Kiddie Tax Simplification: Section 1(g) imposes the so-called “kiddie tax” on the net unearned income of certain minors. Generally, the tax applies where a child is age 18 or under on the last day of the taxable year (or age 23 or under and a full-time student on such date), the child has at least one living parent at such time, the child has more than $2,100 of unearned income for the year (that was the 2017 threshold), and the child does not file a joint return. If the child is 18 or older, however, the tax does not apply unless the child’s earned income is less than one- half of the amount of the child’s support. Unearned income us defined generally as all income other than compensation for services and distributions from qualified disability trusts. Where the tax applies, the child’s net unearned income (unearned income in excess of the $2,100 threshold for 2017), is taxed at the parents’ marginal rate if such rate is higher than the rate that would be applicable to the child. Earned income is unaffected by the kiddie tax.

The Tax Cuts and Jos Act simplifies this regime through 2025. Instead of taxing net unearned income at the parent’s marginal rate, net unearned income is taxed using the same brackets and rates as in effect for trusts and estates. As before, earned income of a minor child is still taxed using the ordinary rates and brackets for unmarried persons. The thinking behind this change is that the child’s tax is now “unaffected by the tax situation of the child’s parent or the unearned income of any siblings.” (Conference Report, page 9).

Paid Preparers Must Investigate Claims of Head of Household Status: The Tax Cuts and Jobs Act modifies §6695(g) to direct promulgation of regulations imposing due diligence requirements on paid tax return preparers in determining a taxpayer’s eligibility to file as a head of household. Failure to meet these requirements results in a $500 penalty per failure.

Increased Contribution Limits to ABLE Accounts: Late in 2014, Congress created §529A, which authorized states to create so-called “qualified ABLE programs” under which one could make contributions to a tax-exempt account for the benefit of a disabled individual. A disabled person (defined as one who would qualify as blind or disabled under Social Security Administration rules) may have a single account to which total annual contributions may not exceed the federal gift tax annual exclusion amount ($14,000 at the time, but now $15,000).

Income from the account is exempt from federal income tax, and distributions made to the beneficiary for “qualified disability expenses” are likewise tax-free. Qualified disability expenses are defined broadly to include education, housing, transportation, employment training, assistive technology, health, wellness, financial management, and legal expenses (some of which are not already covered by Medicaid and OASDI benefits). Any other distributions, however, are subject to a 10-percent penalty and count as resources for purposes of the beneficiary’s Medicaid exemption. There is no income tax deduction for contributions to the account, and any such contributions from third parties are treated as completed gifts of present interests to the beneficiary. Assets inside of an ABLE account do not count as “resources” of the beneficiary for purposes of qualifying for federal assistance. If, however, the account balance ever exceeds $100,000, the beneficiary will be denied eligibility for SSI benefits. Furthermore, any assets inside of the account upon the beneficiary’s death are subject to Medicaid payback rules.

The Act provides that through 2025, once $15,000 has been contributed to an ABLE account, the account’s designated beneficiary generally may contribute an additional amount up to such beneficiary’s compensation for the year or, if less, the federal poverty line for a one-person household. Moreover, any such additional contribution is eligible for the so-called “saver’s credit” under §25B.

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