The new Tax Cuts and Jobs Act is bringing sweeping reform to the United States tax code. While recent tax reform has drawn considerable media attention to domestic corporate tax rates, it will also have a significant impact on individuals, including revisions to the individual tax rates and a general overhaul of deductions and credits. With new updates to the withholding tax tables, many individuals will experience a direct impact from revisions to the tax rates in early 2018. Understanding how the new provisions affect you, in order to take a more proactive approach to individual tax planning, is imperative.
The following changes will have the largest impact on individual taxpayers:
Standard Deduction Nearly Doubled
Taxpayers who do not itemize but claim the standard deduction instead, will enjoy a new higher standard deduction (nearly double) for 2018. For 2017 and prior, the standard deduction is $6,350 for individuals who are “single” or “married filing separately;” $9,350 for “heads of household;” and $12,700 for “joint filers” or “surviving spouses.” Under the new Act, amounts for standard deductions have increased to $12,000 for individuals filing single or married filing separately; $18,000 for heads of households, and $24,000 for joint filers or surviving spouses. The significant increase means that a greater number of individuals will use the standard deduction instead of itemizing in the future.
Personal Exemptions Eliminated
For the 2017 tax year and prior, individuals were provided a reduction in income known as the “personal exemption” for the filer, spouse, and all dependents. The amount of the personal exemption is $4,050 for 2017. With the new Act, the personal exemption has been eliminated. Due to the increase in the standard deduction, the elimination of the personal exemption may not impact all individuals; however, those who itemize and claim multiple dependents may be negatively impacted by this elimination.
Miscellaneous Itemized Deductions Eliminated
Prior law allowed individuals to deduct certain miscellaneous items, including:
- Unreimbursed employee business expenses.
- Unreimbursed vehicle expenses.
- Investment expenses.
- Tax preparer fees.
- Expenses allowed under the “hobby loss” rules.
The above deductions were subject to dollar limitations; however, many taxpayers received a deduction for at least a portion of these expenses. Under the new Act, miscellaneous itemized deductions are no longer permitted. As such, taxpayers no longer need to track expenses such as investment or unreimbursed employee business expenses.
State and Local Taxes Capped
Taxpayers who itemize and deduct state, local, and foreign taxes now face a $10,000 cap. The cap includes state and local property taxes, state and foreign income taxes, and general sales taxes. Taxpayers with significant state, local, and foreign taxes (in excess of $10,000) may notice a higher tax bill for 2018 and future years.
Charitable Contributions Restricted
The good news pertaining to charitable contributions is that the income percentage limitation on total contributions to a nonprofit organization increased by 10% (from 50% to 60% of adjusted gross income). However, the bad news is that taxpayers contributing to a college or university in exchange for the right to purchase athletic tickets will no longer receive a deduction for their donation.
Itemized Deductions Limit Increased
The new Act eliminates the limit on the total allowable itemized deductions for high-income taxpayers. In the past, taxpayers with significant itemized deductions were subject to an overall limitation of 3% of the amount by which their adjusted gross income exceeded a threshold specific to their filing status. Under the new law, this limitation is suspended, resulting in high-income earners having the ability to deduct more of their itemized deductions.
How PYA Can Help
While this is not an all-inclusive list of changes to the tax law, PYA continues to monitor developments and will provide future insights with more in-depth information throughout the year. PYA’s team of tax professionals can help you develop and execute a strategic plan for tax minimization and assist with financial planning. If you have any questions about the impact of tax reform on individuals, contact one of our PYA executives below at (800) 270-9629.
Access additional tax reform insights here.