Legal Alert The Tax Cuts and Jobs Act Highlights on Individual Income and Estate Taxes

Authored by Cindy A. Wolfer

In General

Here are highlights of how the final tax bill addresses key areas of the federal tax code for individuals beginning generally in 2018 through the 2025 tax year.  Deductions that are “suspended” will not be permitted between 2018 through 2025.  If you will itemize deductions in 2017, see the end of the article for year-end planning strategies.

Highlights

Individual Rates:  The top individual rate will be 37% for individuals earning $500,000 and above and joint filers earning at least $600,000.  There will be seven tax brackets – 10, 12, 22, 24, 32, 35 and 37%.  Rates are indexed for inflation beginning after 2018.

Personal Exemptions:  Suspended.

Standard Deduction:  The standard deduction is nearly doubled to $12,000 for single filers, $18,000 for head of household filers and $24,000 for couples filing jointly.  The standard deduction will be indexed for inflation beginning after 2018.

Itemized Deductions:

State and local tax deduction will be limited to $10,000.

Mortgage interest deduction on indebtedness incurred after December 15, 2017, will be limited to indebtedness of $750,000.  The interest deduction on home equity lines of credit is suspended.

Miscellaneous deductions:  Deductions subject to the 2% floor are suspended, including expenses attributable to the trade or business of being an employee.

Medical expense deduction:  Taxpayers can continue to deduct medical expenses exceeding 7.5% of adjusted gross income (“AGI”) for 2017 and 2018.  The “floor” was dropped from 10% of AGI.

Charitable Deductions:  The limits on the deductibility of cash charitable deductions are increased from 50% to 60% of AGI.  Repeal of 80% charitable deduction for contributions for university athletic seating rights.

Child Tax Credit:  The child tax credit is increased to $2,000 per child, with up to $1,400 of it being refundable.

Moving Deduction:  The deduction for moving expenses are suspended, but still generally available for active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station.

Alimony Deduction:  Elimination of the current above-the-line deduction for alimony payments for divorce decrees, separation agreements and certain modifications entered into after 2018.

Alternative Minimum Tax (“AMT”):  The individual AMT is increased to apply to individual filers earning more than $500,000 or joint filers earning more than $1 million or more.

Estate, Gift and Generation-Skipping Tax:  The exemption is doubled for estates worth about $11 million for individuals and $22 million for couples.  The exemptions would revert to current levels after 2025.  Review your estate plan to see how your plan is affected by these increased exemptions, particularly if your plan uses formulas for funding trusts or gifts.

2017 Year End Planning

Beginning in 2018, most individuals will see modest reduction in his or her income tax rates and fewer will benefit from itemizing deductions and will instead use the higher standard deduction.  Therefore, individuals planning to itemize in 2017, should consider strategies to accelerate the payment of itemized deductions before the December 31 year end in order to be permitted a deduction in 2017.  Here are some suggestions:

  • Prepay 2017 State and Local taxes:  Accelerate payment of a fourth quarter 2017 estimated state or local income tax payment and your 2017 real estate taxes due in 2018.  However, prepayments for future state and local income taxes (like for your 2018 income tax liability) may not be deducted on your 2017 federal income tax return. The Allen County Treasurer’s office is accepting payment for 2017 real property taxes due in 2018 until 4 pm Friday, December 29th or for best results pay on line by echeck.  Include your duplicate tax number, parcel number or property address with the check.
  • Charitable Contributions:  Either accelerate direct contributions to charities or contribute cash (or appreciated securities if available) to a donor advised fund.  Donor advised funds can be established on line with various organizations including, Fidelity, Schwab, Vanguard and certain banks.  Once funds are contributed, you may direct distribution only to qualified 501(c)(3) organizations. A donor advised fund can be used to control distributions to your favored charity in future years.
  • Miscellaneous Deductions Subject to 2% Floor:  If you have these types of expenses, consider acceleration of payment in 2017 if possible.
  • Mortgage Interest.  Make your January mortgage payment before December 31.

Taxpayers subject to AMT will have a reduced benefit from the accelerated payment of itemized deductions in 2017.

The Legal Alert is for general information purposes only, and is not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction and does not purport to be comprehensive.  Under no circumstances should any information contained in this Legal Alert be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy.  Any reliance upon any such information is solely and exclusively at your own risk.  Please consult your own counsel, accountant or other advisor regarding your specific situation.   Rothberg Logan & Warsco LLP will not be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission.