The following summarizes the changes in the new tax law as they apply to individuals:
One of the benefits of the TCJA, for some individuals, is lower tax rates. There are seven individual income tax brackets under tax reform. The top individual income tax rate for ordinary income will be 37%.
Here are the tax rates for married individuals filing joint returns and surviving spouses:
| If taxable income is: | The tax is: |
| Not over $19,050 | 10% of taxable income. |
| Over $19,050 but not over $77,400 | $1,905, plus 12% of the excess over $19,050. |
| Over $77,400 but not over $165,000 | $8,907, plus 22% of the excess over $77,400. |
| Over $165,000 but not over $315,000 | $28,179, plus 24% of the excess over $165,000. |
| Over $315,000 but not over $400,000 | $64,179, plus 32% of the excess over $315,000. |
| Over $400,000 but not over $600,000 | $91,379, plus 35% of the excess over $400,000. |
| Over $600,000 | $161,379, plus 37% of the excess over $600,000. |
Individual Tax Deductions:
There are several deductions that will be eliminated or reduced, which may or may not be offset by a larger standard deduction:
- Individuals (as opposed to businesses) are only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes.
- Under current rules, alimony payments generally are an above-the line deduction for the payer and included in the income of the payee. Under the new law, beginning in 2019, alimony payments aren’t deductible by the payer or included in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2018. For any divorce decree or separation agreement executed prior to 2019, the new law will apply if such agreement is modified after 2018 and the modification expressly provides that the new law applies to the modification.
- The itemized deduction for charitable contributions is not eliminated, however, because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for you because you won’t be able to itemize deductions.
- The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. It is important to be aware that that next year, many individuals will have to claim the standard deduction because many itemized deductions have been eliminated.
- The principal residence mortgage interest deduction will be limited to interest on $750,000 of indebtedness, for loans after 2017.
- The following personal exemptions will be eliminated: the deduction for home equity debt, miscellaneous itemized deductions subject to the 2% floor (e.g., investment advisory fees and tax preparation fees), the Pease rule (i.e., phase-out of itemized deductions), the deduction for casualty losses (except for federally declared disasters), and moving expenses (except for certain military personnel).
- Estate, Gift and GST tax exemptions will double to $10 million (expected to be $11.2 million for 2018 with inflation indexing). Thus, for a married couple the combined exemptions would be $22.4 million in 2018.
Notable items that are not changing for individuals include:
- The preferential top rate (i.e., 20%) on capital gains and qualified dividends.
- Annual exclusion gifts ($15,000 for 2018).
- The 3.8% net investment income tax is not changing, thus, net investment income (e.g., interest, dividends, capital gains, annuity income, rents, etc.) will be taxable to the extent it exceeds the applicable thresholds (e.g., single taxpayers $200,000, married filing jointly $250,000).
- A taxpayer’s ability to sell specific lots of securities. The original tax reform bills in the House and Senate would have forced FIFO treatment for the sale of securities (e.g., stocks).
- Stretch-out distributions for beneficiaries of IRAs and other qualified plans.
- Rules for excluding gain on the sale of a principal residence.
Taxpayers should understand that a majority of these tax reform provisions are applicable only through 2025. We will continue to provide you with updates on the new changes in tax laws throughout the year. Please do not hesitate to contact our New York City tax firm in regard to any questions you may have about the Tax Cuts and Jobs Act.