Tax Reform - Notable Changes for Individuals

by Trent Krassow, ARe, ARM, CMA, EA, MBA

While the Tax Cuts and Jobs Act (TCJA, also known as “Tax Reform”) has many components that will inevitably affect different taxpayers in nuanced ways, there are a few key components that will likely have a much broader impact. This is an overview, and we’ll add additional articles on various Tax Reform topics in the future. It is also important to remember that many of these changes are temporary, pending the will of future Congresses. 

  • Tax Rates (Download our “Tax Reform Cheat Sheet” for the rates and brackets)

  • Personal Exemptions

  • Standard Deductions

  • Itemized Deductions have some new rules

  • Obamacare Penalty – Outta here!

  • Child Tax Credit

  • Brand new deduction for small business owners – this is huge!

While these topics are broad in their impact, there are still individual differences that dictate precisely how Tax Reform will affect you personally. Nothing in this article or on Odstrcil & Meis’s website should be construed as tax, legal, or professional advice. If you are currently a client of Odstrcil & Meis, please contact us to discuss any specific application of the tax laws. If you are not currently a client of Odstrcil & Meis, we recommend that you contact your tax professional to delve into the specifics of your situation. By the way, we would love the opportunity to put our team of professionals to work for you in tax and financial matters. You can contact us here, or by calling our office at 970-352-0661. 

Tax Rates 

One of the stated objectives of tax reform was to simplify the code, reducing the number of tax brackets down to three. That didn’t quite happen – we still have just as many brackets and rates as before – but the new law did manage to lower all of the rates and generally extend the brackets so that more people will qualify for the lower rates. The highest rate went from 39.6% down to 37%. Rates for capital gains and qualified dividends did not change, but how and when those rates are applied may vary based on other factors in your situation. 

Personal and dependent exemptions - Gone! 

Previously, most taxpayers were able to “exempt” a set amount of income for themselves and any dependents ($4,050 in 2017) through personal and dependent exemptions. This was basically the government’s way of saying, “You breathe air, so here’s a tax deduction,” and for the most part, anybody who breathed air received this benefit (most – there were certainly exceptions in the higher income brackets.) Under the new law, these "gimmies" are gone. Not to fear, though, because most (again, there are always exceptions) taxpayers will be better off under the new rules due to a combination of lower rates, higher standard deductions, and a higher child tax credit (along with higher income thresholds to qualify for this credit.) 

Standard deduction almost doubled 

As mentioned, the loss of exemptions is at least partially offset by a more generous standard deduction for many taxpayers. In fact, the standard deduction basically doubled (I am constantly remined by my peers that it is almost doubled, but not quite): 

Standard deductions before and after Tax Reform: 

Before Reform/After Reform

  • Heads of household: $9,350/$18,000

  • Married filing jointly: $12,700/$24,000

  • All other taxpayers: $6,350/$12,000

Historically, more than half of taxpayers have taken the Standard Deduction and not itemized. Obviously, even more people will take the Standard Deduction under the new rules. However, if you previously itemized but the new rules will allow you to take the Standard Deduction, do not think you have “lost” a deduction because of the increase shown above – you still get the deduction (and maybe a little more), just with less paperwork to fill out and keep track of. We would love to help you in this area to make sure you are getting the maximum benefit, whether you itemize or “Go Standard.” 

Itemized deductions have new rules 

Speaking of itemizing, for those of you that will still itemize even with the higher Standard Deduction, there are a few changes here that you need to consider: 

  • The area of itemized deductions that has received the most media attention has been that of state and local taxes (known as SALT in the tax world.) Under the new law, SALT is limited to a total of $10,000 for Married Filing Jointly (MFJ), or $5,000 for Single and Married Filing Separately. Previously, there was no limit on this deduction, except to the extent that Itemized Deductions were limited overall due to Adjusted Gross Income (AGI). As an example, if you live in a higher tax state and paid $13,000 in state income taxes and $7,500 in real estate taxes on your home, you would have paid a total of $20,500 in state taxes. However, you would only be able to deduct the $10,000, and would forego the remaining $10,500. As expected, officials in high tax states complained that this creates an unfair advantage for lower tax states, while lower tax state citizens celebrated that they no longer are penalized for not paying higher state taxes. What is “fair” to one group will be a burden to another.

  • Mortgage interest has also had a lot of attention since President Trump signed the TCJA into law. It should be noted that mortgage interest in general is still deductible if used to purchase or improve a home. The change here is that interest on loans taken against home equity for things like going on vacation or paying off credit cards will no longer be deductible. Interest on home equity loans where the funds were used for business or investment purposes may still be deductible elsewhere on the tax return, depending on the specific circumstances. The other change on this item is the amounts: where previously interest on loans up to $1 million of acquisition indebtedness was deductible, this is now $750,000. Note that this is the loan amount, not the home value. Thus, somebody could buy a $1,000,000 home with a $500,000 mortgage and down payment of equal amount, and all of the interest on that loan would be deductible. Loans that were taken out prior to December 15, 2017 are grandfathered under the old rules.

  • Charitable deductions are actually more generous under TCJA: Cash donations to public charities may now be deductible up to 60% of adjusted gross income, vs. the previous limit of 50%. However, “donations” to colleges and universities for tickets or seating rights at collegiate sporting events are no longer deductible.

  • But, as Uncle Sam giveth, so doth he also taketh away: the miscellaneous itemized deductions at the bottom of Schedule A will be disappearing. This includes deductions for investment management fees, tax preparation fees, job related expenses for which you are not reimbursed, and safe deposit box rental fees.

  • And then he giveth again (sort of): medical expenses, previously only deductible if they exceeded 10% of Adjusted Gross Income (AGI) (7.5% for those over age 65), will, for one year, only require a 7.5% AGI threshold, then go back to a 10% limit starting in 2019. Here is an example of this difference. Suppose you have AGI of $100,000, and medical expenses of $9,500 for the year. How much can you deduct on your tax return? Under the 10% rule, nothing ($100,000 x 10% = $10,000, and since your expenses were only $9,500, none of it is deductible.) Under the 7.5% rule, you could deduct $2,000: $100,000 x 7.5% = $7,500, so your bills exceed this amount by $2,000, so $2,000 is your deduction for medical expenses.

With a few exceptions, most of these deduction areas revert back to the old rules beginning January 1, 2026. Of course, none of us knows what Congress will look like that far out, or what additional changes Congress may make between now and then. 

Individual shared responsibility payment 

One tax change that is permanent is the repeal of the individual shared responsibility payment for failure to maintain minimum essential healthcare coverage, also known as the Obamacare Penalty or Individual Mandate. But before you drop your coverage in excitement (which we generally do not recommend, by the way), know that the penalty still applies for 2018, and the repeal of the penalty only effects those who drop coverage after 12/31/2018. In any event, it is always prudent to ensure you have a plan to pay for those unexpected medical events, whether that includes traditional insurance, self-pay, medical subscription, or other risk management models. While our firm does not sell any such products, we have relationships with licensed professionals who do, and we can also assist in your analysis of financial risk in this area.  

Child and family tax credit 

The new law basically doubled the child tax credit (from $1,000 with limitations to $2,000, still with some caveats), and increased the amount a family can earn and still qualify for this credit – married couples making up to $400,000 may still fully qualify if the rest of the tax stars are aligned.) Technically, this is a consolidation of two prior credits rather than a doubling of the child tax credit, but functionally for many taxpayers, it will serve as doubling the child tax credit. We’ll provide a more in-depth discussion of these topics in another article.  

New deduction for qualified business income 

A potential tax game changer for many small business owners is the new deduction of 20% of qualified business income resulting from a partnership, S Corporation, or sole proprietorship (yes, those single member LLC’s qualify, too!) This also extends to REIT dividends and certain publicly traded partnerships. As with many things in the tax code, this new deduction has caveats, exceptions, special calculations, etc. that make it far from “universal.” If you are self-employed or an owner or partner of a small business or qualified REIT or publicly traded partnership, we would love to sit down with you to see how you may benefit from this new tax provision. 

As we previously mentioned, the Tax Cuts and Jobs Act is full of goodies for lots of different taxpayers, but it is also full of carve outs, phase outs, exceptions, etc. It is impossible to give universal tax, accounting, or legal advice in a web article, as the specifics of your situation will determine how tax law is applied for you. We recommend that you contact the qualified professional of your choice to discuss your situation in depth. Our seasoned tax pros are well versed in the old rules (ever changing as they were), and have spent a lot of time studying the new rules under the Tax Cuts and Jobs Act, and we would love to help with your questions and tax needs.

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