The conference committee’s reconciliation of the tax reform bill, formerly the Tax Cuts and Jobs Act (TCJA), passed by Congress on December 20, 2017 includes significant changes to the taxation of individuals, as well as changes impacting estates, trusts, and gifts. For individuals, it is more difficult to state that these changes will provide significant tax benefits, particularly for low and middle-class workers, and especially if the act’s temporary provisions are allowed to expire. Although there are few provisions directly affecting the taxation of trusts, it is clear that fewer individuals will be burdened with estate and gift taxes due to increased exemption amounts.
Individual Tax Rates
The first major change on the individual side is a reduction in tax rates, though these new rates are set to expire after 2025. For taxable years beginning after Dec. 31, 2017, the new rates and brackets for married couples and single individuals are:
|Married Filing Jointly and Surviving Spouses:||Single Individuals:|
|10% (Taxable income not over $19,050)||10% (Taxable income not over $9,525)|
|12% (Over $19,050 but not over $77,400)||12% (Over $9,525 but not over $38,700)|
|22% (Over $77,400 but not over $165,000)||22% (Over $38,700 but not over $82,500)|
|24% (Over $165,000 but not over $315,000)||24% (Over $82,500 but not over $157,500)|
|32% (Over $315,000 but not over $400,000)||32% (Over $157,500 but not over $200,000)|
|35% (Over $400,000 but not over 600,000)||35% (Over $200,000 but not over $500,000)|
|37% (over $600,000)||37% (Over $500,000)|
There are also categories for married filing separately and head of household. These rates and brackets are:
|Married Filing Separately||Head of Household:|
|10% (Taxable income not over $9,525)||10% (Taxable income not over $13,600)|
|12% (Over $9,525 but not over $38,700)||12% (Over $13,600 but not over $51,800)|
|22% (Over $38,700 but not over $82,500)||22% (Over $51,800 but not over $82,500)|
|24% (Over $82,500 but not over $157,500)||24% (Over $82,500 but not over $157,500)|
|32% (Over $157,500 but not over $200,000)||32% (Over $157,500 but not over $200,000)|
|35% (Over $200,000 but not over $300,000)||35% (Over $200,000 but not over $500,000)|
|37% (Over $300,000)||37% (Over $500,000)|
These rate and bracket charts also show shifting priorities as the legislation emerged from the conference committee. The final tax bracket structure does not embrace the simplification efforts that were first championed by Speaker of the House Paul Ryan (R-WI), where the conference report keeps the current number of tax brackets. Also, the merged TCJA contains a significant marriage penalty for wealthy individuals, with the highest 37 percent rate bracket for single individuals beginning at $500,000, but beginning only slightly higher at $600,000 for married couples filing joint returns. Finally, the House’s plan to phase-out the benefit of certain lower rate brackets for wealthy individuals was eliminated. The capital gains rates under current law will remain at 0 percent, 15 percent, and 20 percent, and the Net Investment Income tax together with the 0.9 percent Additional Medicare Surcharge will remain as well. The capital gain thresholds for single filers will be $38,600 ($77,200 for married couples) for the 15 percent rate, and for single filers will be $425,800 ($479,000 for married couples) for the 20 percent rate.
Individual Deductions and Child Tax Credit
The increased standard deduction amounts from the earlier Senate bill were adopted. For taxable years beginning after Dec. 31, 2017, the new amounts are therefore set at $24,000 for married individuals filing jointly, $18,000 for head of household and $12,000 for single individuals. The enhanced standard deductions for the elderly and the blind are also preserved. Again, chained CPI will be used as the inflation measure for these amounts. These increases expire after 2025, though the chained CPI inflation adjustment will remain.
Personal exemptions for individuals are eliminated, as was proposed in both bills previously. An increased child tax credit instead is provided in their place. The new credit amount is $2,000, of which up to $1,400 is refundable. The credit will begin to phase out at an income threshold of $400,000 for married couples filing joint returns ($200,000 for all other taxpayers). This threshold is not adjusted for inflation. Taxpayers will be able to claim a $500 nonrefundable credit for each non-child dependent. All of these provisions will expire with the individual tax cuts in 2025.
The individual state and local income and sales tax deduction was retained, despite high profile debates on the topic. However, a combined limitation covering state and local property taxes as well as income/sales taxes now applies in the amount of $10,000. Also, a provision was added to specifically prohibit a deduction for the prepayment of future state and local income taxes in 2017. Presumably, this limitation was added to prevent taxpayers from attempting to avoid the $10,000 limit in 2018.
The itemized deduction for medical expenses was preserved, with a decrease in the AGI threshold used to determine the amount of deductible medical expenses, from 10 percent to 7.5 percent in 2017 and 2018. All deductions for miscellaneous itemized deductions subject to the 2 percent floor are repealed for taxable years beginning after Dec. 31, 2017 and before Jan 1, 2026. This results in the elimination of the deductions for employee business expenses, tax preparation fees, and attorney fees, among others.
The overall limitation for itemized deductions (the “Pease” limitation), however, is suspended for 2018 through 2025. This will allow higher income individuals to claim itemized deductions, in contrast to current law which limits itemized deductions once an individual’s income exceeds certain thresholds.
Other Individual Provisions
The conference report generally preserved the other existing credits and deductions for individuals, though there are notable changes to these provisions. The following credits, deductions, and exclusions were wholly unchanged:
- Adoption credit
- Educator expense deduction
- Education credits (American Opportunity and Lifetime Learning credits)
- Earned Income Credit
- Employer provided housing exclusion
- Exclusion for adoption assistance programs
The Alternative Minimum Tax (AMT) for individuals is retained in the reconciled act, and features increases from the current exemption amounts. For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return ($70,300 for single filers), with a phase out threshold of $1,000,000 for married taxpayers filing a joint return ($500,000 for single filers).
The deduction for qualified moving expenses is also suspended for taxable years 2018 through 2025 for all taxpayers other than active duty members of the military, who must still meet the rules for military moves.
Other provisions that were changed in one or both chambers’ bill that made it into the conference report are:
- The current law treatment for exclusion of gain on the sale of a principal residence was preserved, where the House bill would have allowed a reduced exclusion, but the ownership and use tests would have been extended from two of the last five years to five of the last eight years. The House bill also would have limited the exclusion to once every five years. The Senate bill mostly followed the House bill, but the final act does not include either provision.
- For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the mortgage interest deduction limitation is reduced to $750,000 for loans originating after Dec. 14, 2017, and through 2025. The deduction for interest on home equity indebtedness is suspended for the taxable years 2018 through 2025 as well.
- The penalty for failing to maintain minimum essential health insurance coverage (the individual mandate) was reduced to $0 for months beginning after Dec. 31, 2018, effectively eliminating it.
- The deduction for the living expenses of members of Congress is also eliminated.
- The AGI limit for charitable deductions is increased from 50 percent to 60 percent until 2026. However, the 80 percent charitable contribution deduction for contributions made for university athletic seating rights has been eliminated.
- The deduction for personal casualty losses has been significantly limited. The deduction is generally allowed only if the loss was the result of a federally-declared disaster. For instance, a taxpayer whose home was destroyed by flooding from a burst water pipe would not be allowed a deduction, whereas a taxpayer whose home was flooded as a result of Hurricane Irma would be allowed a deduction.
- The limitation for gambling losses is expanded to include (in the definition of losses) all deductions incurred in carrying out wagering transactions (for example travel expenses).
- The alimony expense deduction and corresponding inclusion in income for the recipient spouse is repealed for separation instruments executed after Dec. 31, 2018.
- Elementary and high school expenses are now qualifying expenses for Section 529 plans, though a provision to allow contributions on behalf of unborn children was dropped as it did not comply with the budget reconciliation rules.
- Discharge of indebtedness income from a student loan received as a result of the death or total permanent disability of the student will no longer be included in income.
- The contribution limits for ABLE accounts are increased in specific situations, and the designated beneficiary can claim the saver’s credit for amounts contributed to ABLE accounts, and further, rollovers from 529 plans to ABLE accounts will be permitted in some situations.
Estates, Trusts, and Gifts
The changes to the estate, trust, and gift taxes are much less extensive than the individual tax changes, but are nevertheless significant. Elimination of the estate tax was not possible due to the potential effect on deficit restrictions under the budget reconciliation rules. Instead, the estate tax exemption was doubled to approximately $11 million for individuals and $22 million for couples. This is paired with an identical increase in the exclusion for the generation skipping transfer tax. Because the estate tax exclusion is unified with the gift tax exclusion, the gift tax will also affect fewer individuals. The doubling of the exemption expires at the end of 2025, along with many of the other individual tax changes.
On the other hand, the annual exclusion amount for gifting remains unchanged, though it increases in 2018 to $15,000/donee/year after inflation adjustments. Likewise, the combined estate and gift tax rate and generation skipping transfer tax rate both remain unchanged at 40%. Furthermore, it appears that assets held by a decedent at death will continue to obtain a stepped-up basis to date of death value, as under current law. This ability to obtain a stepped-up basis will remain a cornerstone of planning for many.