In December of 2017, President Trump signed into law H.R 1, known more commonly as the Tax Cuts and Jobs Act (TCJB). The law, which sought to simplify certain aspects of the tax code and lower tax rates for all taxpayers, is the most significant tax reform legislation passed since 1986.  Provisions of the law apply to both individual and corporate taxpayers. The changes  applicable to corporations are permanent, while those relevant to individual taxpayers will expire in 2025,  unless Congress intervenes. While corporate tax reform was a key part of the TCJB, this article will attempt to make readers aware of important changes that effect individual taxpayers.

Standard Deduction, Personal Exemption, and Child Tax Credit

Starting in the current tax year  of 2018, the standard deduction will nearly double to $12,000 for single taxpayers, and $24,000 for married couples filing joint tax returns. By comparison, the amount afforded taxpayers in 2017 for the same deduction was $6,350 and $12,700 for single and married filing joint taxpayers, respectively. Another well-known tax break individuals are accustomed to receiving is the personal exemption. The personal and dependency exemption, similar to the standard deduction, is a statutory deduction against taxable income available to taxpayers. Taxpayers may also claim a dependency exemption for certain dependents. Under the provisions of TCJB, the personal and dependency exemption is eliminated entirely. Families, and particularly families with multiple children, will notice the loss of this benefit.  In an effort to curtail the negative effects of the loss of this exemption on low and middle income  for taxpayers with dependent children, Congress doubled the child tax credit, from $1,000 to $2,000 per child under the age of 17. In addition, the income threshold for the ability to claim the credit was significantly increased, potentially providing benefit for families with adjusted gross income as high as $400,000. This change is particularly friendly to taxpayers with young children, as tax credits are generally more valuable than a deduction.

Itemized Deduction

As previously noted, one of the primary goals of the tax reform legislation was simplification of the tax code. To that end, Congress made changes that will significantly decreases taxpayers’ ability to claim itemized deductions. Taxpayers receive a tax benefit from medical expenses, mortgage interest, and charitable contributions only to the extent the aggregate of these amounts exceed the allowable standard deduction. With the standard deduction increasing , fewer taxpayers will need to claim itemized deductions. Further limiting the ability to claim itemized deductions, the TGRA places a $10,000 cap on state and local income, real estate, and personal property taxes. This provision will be especially punitive to high income taxpayers, and individuals who live in high tax states.  During the debate of the TCJB, there was considerable talk of the elimination of the deduction for mortgage interest. Congress decided to put in place limitations of the popular deduction rather than remove it entirely. The law eliminates deductibility  of interest paid on a home equity line of credit to the extent the proceeds are used for personal expenditures. Individuals accustomed to getting a tax break from HELOC interest used by automobiles or consolidate credit card debt will no longer be able to that. Interest paid on a home-equity line of credit will still be deductible if the proceeds are used in acquiring a second home or making significant improvements to an existing residence.

Deduction For Qualified Business Income

The TCJB allows for a deduction equal  to 20% of “qualified business income” that is reported on an individual taxpayer’s tax return. The details of this deduction are too complex for a short article such as this, but the general idea is this – any taxpayer who reports pass-through income from a partnership,  a Subchapter S Corporation, or operates as a sole-proprietor and reports their business income directly on their  Form 1040-Schedule C may benefit from the deduction. A simple example is as follows – assume a taxpayer operates a lawn and landscaping service as a sole proprietor. After reporting gross receipts, and deducting allowable business expenses, the taxpayer’s net profit from the lawn and landscaping service is $100,000. In this case, the deduction for qualified business income would be $20,000. The taxpayer would essentially be paying income tax on only 80% of the businesses’ net profit.

Conclusion

This article only attempts to summarize a handful of changes that will come into play for a broad range of individual taxpayers. If you would like advice on how any of the provisions of the TCJB will affect your individual tax picture and any planning considerations you should make in light of them, one of the many qualified professionals in our office would be eager to help you.
Carr Hammond is a partner of Silas Simmons LLP.