Tax Cuts and Jobs Act of 2017: Individual Tax

On December 20, 2017, Congress passed the Tax Cuts and Jobs Act designed to cut taxes on individuals and businesses. Under the new law, there are several changes to individual income tax, including changing the income level of individual tax brackets, lowering tax rates, and increasing the standard deductions and family tax credits while itemized deductions are reduced and the personal exemptions are eliminated.

Most individual income tax are reduced. The following table shows the changes of tax brackets and tax rates and these changes are effective for tax year 2018. While the number of tax brackets has been retained, each one has been reduced slightly. A different inflation measure will be applied to the brackets instead of the Consumer Price Index (CPI), so the brackets increase more slowly. People will move more quickly into higher brackets as their income rises, so the income tax may increase quickly over time.

The standard deduction increased from $12,700 to $24,000 for married couples and increased from $6,350 to $12,000 for single filers. The personal exemption was $4,050 per taxpayer and dependent. Under the new law, this exemption is eliminated.

Many of the itemized deduction rules have changed in this Act. Mortgage interest deduction for newly purchased homes (and second homes) was lowered from total loan balances of $1 million to $750,000. The deduction for state and local income tax, sales tax and property taxes will be capped at $10,000. The act repeals the individual mandate of the Affordable Care Act effective Jan 1, 2019. The medical deduction is retained, with the 7.5% of AGI floor retained for all taxpayers for 2017 and 2018. After 2018, the threshold returns to 10% of AGI. Miscellaneous itemized deductions subject to the 2% of AGI floor are repealed. The phaseout of itemized deductions for high-income taxpayers is also repealed.

The amount of child tax credit increased from $1,000 to $2,000 per qualifying child. The refundable portion of the credit increases to $1,400. There is also a $500 credit for other dependents in new law.

For deaths occurring between 2018 and 2025, estates that exceed $11.2 million are subject to a 40% estate tax at time of death, increased form $5.6 million in previous law. For a married couple aggregating their exemptions, an estate exceeding $22.4 million are subject to an estate tax.

Most of these individual tax changes will sunset on Dec 31, 2025.