With passage of the Tax Cuts and Jobs Act (TCJA), many American taxpayers are asking, "Should I take action before December 31? What is likely to be the impact of TCJA on me next year?"
An overview of TCJA is a helpful place to start. This explanation will cover the main provisions affecting individual taxpayers.
- Rates - The current seven rates are slightly reduced for most taxpayers. The seven TCJA rates range from 10% to 37%. The 37% bracket applies to taxpayers with income over $600,000 if married and $500,000 if single.
- Capital Gains - The capital gains rules have largely been retained. The rate is 0% for low income taxpayers, 15% for those in the 22% or higher income tax bracket and 20% for married couples with income over $480,050 and single individuals with income over $426,700. There also is a 3.8% Medicare tax on capital gains for upper-income taxpayers.
- Standard Deductions - TCJA nearly doubles the standard deduction for 2018. The standard deduction will be $24,000 for married couples and $12,000 for single individuals. The personal exemptions are repealed.
- Mortgage Interest - Homeowners may deduct interest for new loans up to $750,000 on first and second homes. Existing mortgages up to $1 million will be grandfathered.
- State and Local Taxes - Taxpayers may deduct up to $10,000 per year in combined property, state income and local income taxes. There is an option to substitute state sales tax for state income tax.
- Medical Expenses - The deduction is expanded by reducing the floor to 7.5% of adjusted gross income for 2017 and 2018. The medical expense floor will be 10% starting in 2020.
- Alternative Minimum Tax (AMT) - The 2018 AMT exemptions are increased to $109,400 for married couples and $70,300 for single taxpayers.
- Child Tax Credits (CTC) - The CTC is increased to $2,000 per child under age 17. There is a $1,400 portion of the credit that is refundable.
With these significant changes coming in 2018, what planning steps may make sense for 2017? If you are itemizing deductions this year and are likely to take the new higher standard deduction in 2018, then it is helpful to increase your 2017 itemized deductions.
You may increase your 2017 itemized deductions by paying your January mortgage payment in December and by making larger charitable gifts. Many taxpayers will increase their year-end charitable gifts in 2017 and then take the larger standard deduction in 2018.
A good plan for "standard deduction" taxpayers who are over 70½ in 2018 will be to make charitable gifts through an IRA Charitable Rollover. Because IRA Rollover gifts to charity fulfill your required minimum distribution, you may have lower taxable income. Even with your lower taxable income in 2018, you can still enjoy the benefit of a $24,000 (married) or $12,000 (single) standard deduction.