TEN FACTS ABOUT THE NEW TAX LAW

“The Tax Cuts and Jobs Act” – officially titled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” – has drastically changed the United State Tax Code. 

For tax years 2018 through 2025, when the individual provisions of the Act are scheduled to expire, this new law will affect every single income tax return filed.

Here are ten important things you need to know about the new law.

(1) Tax rates are reduced.

The new tax rates for 2018 are - 

Rate	Single	Head of Household	Married Filing Joint	Married Filing Separately
10%	Up to $9,525	Up to $13,600	Up to $19,050	Up to $9,525
12%	$9,526 to $38,700	$13,601 to $51,800	$19,051 to $77,400	$9,526 to $38,700
22%	$38,701 to $82,500	$51,801 to $82,500	$77,401 to $165,000	$38,701 to $82,500
24%	$82,501 to $157,500	$82,501 to $157,500	$165,001 to $315,000	$82,501 to $157,500
32%	$157,501 to $200,000	$157,501 to $200,000	$315,001 to $400,000	$157,501 to $200,000
35%	$200,001 to $500,000	$200,001 to $500,000	$400,001 to $600,000	$200,001 to $300,000
37%	$500,001  or more	$500,001  or more	$600,001  or more	$300,001 or more

(2) The deduction for personal exemptions is gone. 

You can no longer claim a tax deduction for yourself, your spouse or any of your dependents.  For 2017 this was $4,050 per person.  This substantially reduces the tax benefit of the highly publicized almost doubling of the Standard Deduction amounts.  There is a new $500 tax credit for “non-qualified” children and other dependents – not for the taxpayer and spouse – but this does not fully make up for the loss of the deduction.

(3) The Child Tax Credit is doubled and available to many more taxpayers.

The previously $1,000 credit for each qualified dependent child under age 17 is now $2,000.  And the Adjusted Gross Income (AGI) levels at which the credit begins to be phased out have been substantially increased – to $400,000 for married couples filing a joint return and $200,000 for all other taxpayers.  This more than makes up for the loss of the personal exemption deduction for these dependents.  The credit allowed for dependent children age 17 and older is the $500 mentioned above.   

(4) The lower tax rates for qualified dividends and capital gains remain unchanged.

The new tax law keeps intact the current lower tax rates of 0%, 15% and 20% for qualified dividends, capital gain distributions and long-term capital gains.  But these rates are not tied into the new tax rates and income brackets created by the Act.  The lower tax rates continue to apply to the previous tax rate brackets.  So, for 2018 through 2025 there are two separate sets of tax rates and income brackets – one for “regular” taxable income and one for qualified dividends and capital gains.

The Qualified Dividends and Capital Gains tax rates for 2018, based on net taxable income, are -  

Rate	Single	Head of Household	Married Filing Joint		Married Filing Separate
0%	Up to $38,600	Up to $51,700	Up to $77,200		Up to $38,600
15%	$38,600 to $425,800	$51,700 to $452,400	$77,200 t0 $479,000		$38,600 to $239,500
20%	Over $425,800	Over $452,400	Over $479,000		Over $239,500

(5) The deduction for taxes is limited to $10,000.

The itemized deduction for taxes - state and local income taxes or state and local sales taxes, personal property taxes and real estate taxes – is limited to $10,000, or $5,000 for a married couple filing separately.  A married couple can deduct up to $10,000 in taxes on their Form 1040, but two unmarried taxpayers living together can each deduct $10,000 on their individual returns, for a total of $20,000.  Foreign real estate taxes are no longer deductible on Schedule A.

(6) The deduction for interest on home equity borrowing is gone.

You can no longer deduct interest on home equity debt if you itemize on Schedule A.  Only “acquisition debt” - borrowing secured by a residence that is used to “buy, build or substantially improve” the residence - is deductible.  There is no “grandfathering” of existing home equity debt.  As a result, you can no longer rely on the Form 1098 issued by your mortgage lender to provide the amount you can deduct for mortgage interest. 

Homeowners must keep separate track of their acquisition debt and home equity debt going back to the original purchase mortgage for a residence and including all subsequent refinancing and additional borrowing.

The characterization of debt as “home equity” is based on the use of the money borrowed and not what the loan is called by the lender.  What may be identified as a “home equity loan” or “home equity line of credit” by a bank will be considered “acquisition debt” if the money is used to substantially improve the residence that is secured by the loan.

(7) The deduction for employee business expenses is gone.

Employees can no longer deduct unreimbursed job-related expenses as a Miscellaneous itemized deduction on Schedule A.  This includes union or professional dues, the cost and maintenance of uniforms and work clothes, business travel and entertainment, job-related continuing education, and job-seeking expenses.

(8) The deduction for job-related moving expenses is gone (with one exception).

The cost of moving your household due to accepting a new job or a new job location is no longer deductible as an “adjustment to income”.  Only members of the Armed Forces on active duty who move because of a military order are allowed to deduct their moving expenses.

Similarly, all employer reimbursements for employee moving and relocation expenses (except for qualified military moves) are considered taxable income to the employee.  These reimbursements must now be included in full in taxable federal wages reported on Form W-2.

(9) The deduction for theft losses is gone and the deduction for casualty losses is restricted.

Losses resulting from a theft – defined by the IRS as “the unlawful taking of money or property with the intent to deprive you of it” – are no longer deductible as an itemized deduction on Schedule A.

Only personal casualty losses that occur in a Presidentially-declared disaster area – a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act - are deductible on Schedule A, still subject to the $100-per-casualty and 10%-of-AGI limitations.  

(10) The Alternative Minimum Tax (AMT) is effectively gone.

Upper-middle class taxpayers in highly taxed states no longer have to worry about becoming victims of the AMT. 

Items that had triggered the AMT in the past included the deduction for personal exemptions and the itemized deductions for excessive medical expenses, taxes, home equity debt interest, and Miscellaneous expenses subject to the 2% of AGI exclusion.  These items were not deductible in calculating the AMT.  With the exception of the itemized deduction for taxes these items no longer apply under the new tax law, and the deduction for taxes is limited to $10,000. 

The AMT exemptions have been raised, and they do not begin to phase out until Alternative Minimum Taxable Income (AMTI) exceeds $1 Million for a married couple filing a joint return and $500,000 for all other taxpayers, a huge increase from the previous thresholds.

The Tax Cuts and Jobs Act has made many other changes to the individual income tax return, as well as a multitude of changes to the taxation of business entities.  To find out just how the changes will affect you I recommend you consult your, or a, tax professional.

By the way, the fee you pay to a tax professional to prepare your return or provide tax advice is also no longer deductible as an itemized deduction.

I discuss the Tax Cuts and Jobs Act in more detail, with tax planning advice, in MY book “The GOP Tax Act and the New 1040”.

TTFN