The Tax Cuts and Jobs Act— Individual Changes


Let’s get personal this time. The Tax Cuts and Jobs Act (TCJA) made some significant changes to how individuals will pay taxes in 2018. Here are some of the things you need to know:

Personal Exemptions Eliminated

Beginning in 2018, personal exemptions are eliminated. For 2017, the exemption was $4,050 per person. The increase in the standard deduction makes up for some of the difference. However, many higher-income taxpayers won’t miss the personal exemptions. For married couples, the exemptions were fully phased out at $384,000 of taxable income or lost to alternative minimum tax.

Standard Deduction Almost Doubled

The standard deduction is increased to $24,000, from $12,700, for married filing jointly. Single taxpayers’ standard deduction increases to $12,000, from $6,350. This makes up for some of the deduction lost due to elimination of the personal exemption.

Note:  Taxpayers with deduction totals approaching the standard deduction might consider bunching deductions. Please call us for more information.

Mortgage Interest

The TCJA caps the mortgage-interest deduction at purchases of $750,000 (down from $1,000,000) for mortgages executed after December 15, 2017. However, you can refinance up to $1,000,000 of pre-Act debt and not be subject to the reduced limitation. Also, second home mortgage interest is deductible up to the $750,000 cap.

Home equity interest is still deductible if funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan. The IRS issued additional guidance (IR-2018-32) on February 21st.

Limit on State and Local Tax Deduction

Beginning in 2018, the aggregate deduction is limited to $10,000 ($5,000 married filing separately). This includes state and local income taxes, tag taxes, sales taxes and property taxes.

Note:  Alabama taxpayers who expect to exceed the limit might want to consider an alternative to receive a deduction for the anticipated amount over $10,000. One suggestion involves the Alabama Accountability Act (AAA), which provides scholarships for students to cover the costs of attending a better school. Students can apply for scholarships from one of the scholarship granting organizations (SGOs). A donation to an SGO is an alternative that makes a lot of sense.

(See our January 15, 2018 post for more information about changing a limitation into an opportunity.)

 Good News on Phase-Out of Itemized Deductions

The phase-out, or Pease limitation, is eliminated.

Under pre-Act law, higher-income taxpayers were subject to a phase-out of itemized deductions. For married taxpayers, the 2017 phase-out began at $309,900 of adjusted gross income. Above that number, the allowable amount of itemized deductions was reduced by 3% of the amount of income exceeding the threshold. This might help offset any deduction lost due to the new limit on state and local taxes.

Child Tax Credit Doubled

The child tax credit was increased to $2,000 (under age 17). The credit phases out at $400,000 for married couples and $200,000 for singles. The refundable portion of the credit is $1,400 for 2018.

These are a lot of changes, and the TCJA is complicated. We can help you figure out exactly what these changes mean for you. Please give us a call if you would like to discuss.