United States: Enactment Update: 2017 Tax Reform Bill Individual Effects

On December 22, 2017, President Trump signed the Tax Cut and Jobs Act into law. The comprehensive tax reform bill proposes a lower tax rate for nearly everyone. Effective 2018, the individual income tax brackets and rates will change. Though several significant deductions remain, many other deductions will be eliminated in favor of a higher standard deduction.

Personal Income Tax Rates: Generally, the law will keep or lower the tax rates for all individuals reporting net taxable income below $157,501 annually and nearly all couples regardless of their net taxable income. The law raises taxes by four percent for individuals reporting net taxable income between $157,501 and $195,450 annually and two percent for individuals reporting net taxable income between $200,001 and $424,950 annually. Those couples reporting net taxable income between $400,000 and $424,951 will have a two percent tax rate increase. The most notable difference between the new law and the existing law is the highest tax rate bracket. At 37%, the new highest tax rate bracket is lower than the current highest rate by 2.6%. Significantly, the new law only temporarily lowers the individual tax rates. In 2026, the previous rates "snap-back" into place. For more details, see the charts below.

Individuals

Previous Tax Rates for 2018

New 2018 Rates

10%

Up to $9,525

10%

Up to $9,525

15%

Over $9,525

12%

Over $9,525

25%

Over $38,700

22%

Over $38,700

28%

Over $93,700

24%

Over $82,500

33%

Over $195,450

32%

Over $157,500

35%

Over $424,950

35%

Over $200,000

39.6%

Over $426,700

37%

Over $500,000

Married filing Joint Returns

Previous Tax Rates for 2018

New 2018 Rates

10%

Up to $19,050

10%

Up to $19,050

15%

Over $19,050

12%

Over $19,050

25%

Over $77,400

22%

Over $77,400

28%

Over $156,150

24%

Over $165,000

33%

Over $237,950

32%

Over $315,000

35%

Over $424,950

35%

Over $400,000

39.6%

Over $480,050

37%

Over $600,00


Personal Exemption
: The new law eliminates the current $4,050 per person exemption for individuals, their spouses, and their dependents.

Standard Deduction: The existing standard deduction amounts are $6,350 for individuals and $12,700 for married couples filing jointly. The new law nearly doubles the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly.

Mortgage Interest Deduction: Currently, the mortgage interest deduction is capped at $1 million. The new law reduces the mortgage interest deduction to $750,000 and eliminates home equity loan interest deductions. Generally, the provision only applies to new loans, not existing debt.

State and Local Tax Deductions: Current law allows taxpayers to deduct all state and local taxes and property tax from their income. The new law only allows an itemized deduction for state and local taxes and property taxes up to a combined $10,000.

Medical Expense Deduction: Generally, current law allows taxpayers to deduct medical expenses if such expenses reach the threshold of 10% of the taxpayer's adjusted gross income. The new law lowers the threshold amount to 7.5% of adjusted gross income, but only does so for the 2017 and 2018 tax year.

Miscellaneous Itemized Deductions: Current tax law allows itemized deductions for tax preparation fees, unreimbursed employee expenses, investment advisory fees. All of those deductions will be eliminated, effective 2018 through 2025. During that same period, the new law suspends the overall limitation on itemized deductions.

Child Care Tax Credit: The current child tax credit is $1,000 per child, but the new law will increase the credit to $2,000. However, only $1,400 will be refundable to the taxpayer. The law includes a new $500 credit for non-child dependents. Furthermore, the threshold of families eligible for the child tax credit is increased to $200,000 for individual and $400,000 for those filing joint returns.

Alternative Minimum Tax: The new law preserves the alternative minimum tax (AMT), but increases the amount of income exempt from the AMT. The increased limit expires at the end of 2025.

529 Plans: The new law expands the use of 529 saving plans for K-12 education expenses, including private schools. 1

Estate Tax: The lifetime unified credit exemption equivalent amount for 2017 is $5,490,000 per person. The new law doubles the exemption to $11 million per person.

Individual Insurance Mandate: Significantly, the new law repeals the individual mandate to purchase health insurance under the Affordable Care Act. This change is permanent and does not expire in 2025.

Capital Gains: By and large, capital gains tax will remain the same. The new law lowers the threshold for the 20% rate only for individuals reporting more than $424,950 in taxable income.

Louisiana Impact: Because Louisiana's personal income tax "piggybacks" on federal income tax, any changes to a Louisiana taxpayer's federal tax liability will affect his or her state income tax liability. A Louisiana taxpayer's taxable income is equal to the taxpayer's federal adjusted gross income minus the taxpayer's excess federal itemized deductions and federal income tax.

Overall: Most taxpayers will find that their highest marginal tax rate has decrease. However, the final bill only temporarily reduces taxes. Nearly all of the individual taxpayer changes, including the lower rates, will expire at the end of 2025. The Tax Cut and Jobs Act is the first major U.S. tax overhaul in over thirty years. New guidance and regulation will certainly ensue. We will continue to monitor the bill as it progresses. Look for our companion article addressing the new law's effect on business, including the new personal deduction for business income.

Footnote

1 A previous version of the final bill allowed 529 saving plans to be used on home-schooling expenses. Though the provision was initially passed by the House, it was later removed by the Senate for technical reasons. The Senate Parliamentarian found that the language violated the Congressional Budget Act's prohibition against adding "extraneous material" during the reconciliation process.

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