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Marc A. Hebert's Money Sense: Tax Cuts and Jobs Act -- How does it affect individual taxpayers?

February 16. 2018 7:42PM

On Dec. 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act. It is a mixture of permanent provisions and ones that will expire at the end of 2025 - another law with "sunset" provisions included.

Here is a summary of some of the act's changes.

Individual income tax rates

The new law replaces most of the seven 2017 marginal income tax brackets (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent) with corresponding lower rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.

The law retained seven brackets and simply reduced most of the tax rates by a few points.

Standard deduction and personal exemptions

The legislation increases the standard deduction amounts (See chart below), but repeals the deduction for personal exemptions. The elderly and the blind will continue to receive additional standard deduction amounts.

Given the higher standard deduction amount, few taxpayers are expected to itemize in the coming years.

Itemized deductions

In the past, most itemized deductions were reduced by 3 percent for every dollar of income exceeding $259,400 for single filers and $311,300 for joint ("Pease limitation"). This limitation has been repealed.

The following changes were made to individual deductions:

. State and local taxes: These are limited to an itemized deduction of up to $10,000 ($5,000 if married filing separately). This includes property taxes as well as income and sales taxes.

. Home mortgage interest deduction: The prior limitation was for interest on up to $1 million of qualifying mortgage debt. This limit has been reduced to $750,000 ($375,000 for married individuals filing separately). No deduction is allowed for interest on home equity debt.

. Medical expenses: For tax year 2017 and 2018, the adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses has been set to 7.5 percent.

. Charitable contributions: The law increased the income-based percentage limit for charitable contributions to 60 percent.

. Miscellaneous itemized deductions: Miscellaneous deductions subject to the 2 percent AGI threshold are no longer deductible.

Child tax credit

The act doubled the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount is $1,400. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. 

The threshold at which the credit begins to phase out has been increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Alternative minimum tax

The Alternative Minimum Tax (AMT) was created to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT, and then pay the higher of the two. 

The Tax Cuts and Jobs Act.increased the AMT income exemption amounts and the threshold at which the exemptions begin to phase out (See chart below).

Roth conversions

In a permanent change that starts in 2018, Roth conversions cannot be reversed by recharacterizing the conversion as a traditional IRA contribution by the return due date.

This is only a very brief summary of a few of the law's provisions. We suggest you consult your personal tax adviser or financial planner for how the law might affect your specific tax situation in 2018 and in the years going forward. 

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at Your question and his response might appear in a future column.

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