We summarize here the significant changes brought about by the TCJA law of 2017. Unless renewed by Congress, these changes will sunset in 2025.
Tax bracket rates lowered: There are still 7 tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%, but their respective rates have been lowered. The application of these tax brackets to taxable income is provided in our blog “Quick Income Tax Calculation.”
Long Term Capital Gain (LTCG) and Qualified Dividends thresholds still aligned to old tax brackets: The LTCG tax rate is 0% for those in the old bottom two tax brackets 10% and 15%, 15% for those in the older tax brackets 25%, 28%, 33% or 35%, and 20% for those in the old top tax bracket of 39.6%.
ACA surtax unchanged: An ACA (Affordable Care Act) surtax of 3.8% is charged on investment income (e.g., LTCG) and 0.9% on Medicare income if MAGI (Modified AGI) is >$200K/$250K for Singles/MFJ.
Standard Deduction got bigger: A $12K/$24K Standard Deduction amount for Singles/MFJ was introduced in 2017 and is revised to account for inflation. This larger deduction makes up for the lost Personal Exemptions.
Child tax credit expanded: This is the most commonly used tax credit and it provides $2,000 for each child if MAGI is <$200K/$400K for Singles/MFJ.
Mortgage interest deduction reduced: The interest portion of the mortgage for a primary or secondary residence is tax deductible for up to $750K of the loan balance. Home Equity Line of Credit (HELOC) interest is not deductible unless it is used for home improvement purposes.
State and Property Tax deductions capped: The property taxes combined with state and local taxes can now only be deducted up to $10K, making property tax deductibility for high income tax rate states like CA or NY almost impossible. Please refer to “TCJA Changes to Real Estate” for a more detailed tax analysis of a mortgage loan.
K-12 now a qualified expense for 529 College Savings Plan: K-12 education expenses up to $10K per year per beneficiary is now a qualified distribution for 529 plans. For a more detailed view on 529 plans, please read our blog “College Savings Plan.”
Marriage penalty reduced: The taxable income range for all the tax brackets except for the top tax bracket is double for Married Filing Jointly (MFJ) when compared to that of an Individual.
Estates and Trusts tax bracket rates compressed: Taxable Income >$12.5K will be taxed at the highest 37% rate.
Kiddie tax decoupled from parents: Earned Income is taxed at the Individual tax rate and Unearned Income is taxed at the rate for Estate and Trusts.
Charitable contribution limit expanded: Charitable contribution up to 60% of AGI is now deductible as part of your Itemized Deductions.
Casualty Losses limited: You can only claim a casualty loss in Federal disaster relief areas when itemizing your deductions on Schedule A.
AMT exemption and phaseout threshold increased: The first $70K/$109K of your income is exempt from AMT tax for Singles/MFJ with income <$500K/$1M, exposing far fewer taxpayers to AMT. More information on AMT can be found in “Miscellaneous Tax Topics.”
Estate Tax exemption doubled: The Estate Tax lifetime exemption is at an all-time high with $11.4M/$22.8M of estate value exempt from taxes for Singles/MFJ, sheltering most of the estates from having to pay the 40% Estate Tax. Please read our blog “Estate and Gift Taxes” for more information.
Several provisions were also eliminated by the TCJA law. They include:
- Personal exemption of $4K per dependent
- Pease limitation that reduced Itemized Deduction by 3% for some high-earners, such as Singles with AGI >$262K
- Deductions for moving expenses
- Miscellaneous itemized deductions >2% AGI such as tax preparation fees, unreimbursed employee expense, loss on variable annuity, safety deposit box fees, investment advisory fees, etc.
- Re-characterization of Roth conversion back to the Pre-Tax asset
- Deduction for alimony payments
Please refer to “Income Tax Calculation Flow and Deductions” for a detailed view of where many of the TCJA provisions are applied in the income tax calculation.
We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at Karthik@FinCrafters.com