The Tax Laws Have Changed, and I’ve Never Been More Popular
By Kyle Day
TAX REFORM is here! And with it, tax attorneys and accountants are dusting off their Members Only jackets, popping their collars, and reclaiming their spot as the coolest kid in school. Among other things, the Tax Cuts and Jobs Act (P.L. 115-97), reduces the corporate tax rate from 35% to 21%, establishes a territorial tax system for multinational corporations, lowers the highest marginal individual tax rate from 39.6% to 37%, and allows a deduction for qualified income from passthrough entities.
Over the next few weeks, we will highlight some of the most significant aspects of the new tax laws affecting individuals, corporations, passthrough entities (including S corporations and partnerships), and trusts and estates. Feel free to share the information you learn at your next cocktail party, or, better yet, contact your tax adviser to understand how the Tax Cuts and Jobs Act will affect you.
Individual Tax Reform
Ordinary Income Tax Brackets. Under prior law, the individual income tax brackets were composed of seven brackets ranging from 10% to 39.6%. The Tax Cuts and Jobs Act retains the seven brackets, but reduces the rates in the top six brackets and widens the top four brackets.
Before Tax Cuts and Jobs Act (see Revenue Procedure 2017-58)
| Single Income | Rate | Joint Income | Rate | |
| 0 – 9,525 | 10% | 0 – 19,050 | 10% | |
| 9,525 – 38,700 | 15% | 19,050 – 77,400 | 15% | |
| 38,700 – 93,700 | 25% | 77,400 – 156,150 | 25% | |
| 93,700 – 195,450 | 28% | 156,150 – 237,950 | 28% | |
| 195,450 – 424,950 | 33% | 237,950 – 424,950 | 33% | |
| 424,950 – 426,700 | 35% | 424,950 – 480,050 | 35% | |
| 426,700 + | 39.6% | 480,050 + | 39.6% |
After Tax Cuts and Jobs Act (through 2025)
| Single Income | Rate | Joint Income | Rate | |
| 0 – 9,525 | 10% | 0 – 19,050 | 10% | |
| 9,525 – 38,700 | 12% | 19,050 – 77,400 | 12% | |
| 38,700 – 82,500 | 22% | 77,400 – 165,000 | 22% | |
| 82,500 – 157,500 | 24% | 165,000 – 315,000 | 24% | |
| 157,500 – 200,000 | 32% | 315,000 – 400,000 | 32% | |
| 200,000 – 500,000 | 35% | 400,000 – 600,000 | 35% | |
| 500,000 + | 37% | 600,000 + | 37% |
Deductions, Credits, and Exemptions. The Tax Cuts and Jobs Act significantly increases the amount of the standard deduction for each filing status, as follows:
| Filing Status | Before Tax Cuts and Jobs Act | After Tax Cuts and Jobs Act |
| Married Filing Jointly | 13,000 | 24,000 |
| Head of Household | 9,550 | 18,000 |
| Single/Married Filing Separately | 6,500 | 12,000 |
In exchange for the increased standard deduction and child tax credit, the Tax Cuts and Jobs Act sets to zero the personal exemption deduction and dependency exemptions.
With respect to itemized deductions, the Tax Cuts and Jobs Act reduces the amount of allowable itemized deductions and otherwise limits a number of popular deductions.
- Taxpayers’ ability to deduct mortgage interest is limited to only acquisition debt capped at $750,000 ($375,000 for Single, Married Filing Separately). This means under the Tax Cuts and Jobs Act taxpayers will be unable to deduct home equity loan mortgage interest.
- The amount a taxpayer will be permitted to claim for non-trade or business state and local taxes is limited to $10,000 ($5,000 Married Filing Separately).
- The deduction limit for cash contributions to charitable organizations is increased from 50% of the taxpayer’s “contribution base” to 60%. However, the deduction for 80% of payments to an institution of higher education in exchange for the right to purchase seats at an athletic event (sorry Hawkeye season ticketholders) is eliminated.
The Tax Cuts and Jobs Act also doubles the child tax credit from $1,000 per child to $2,000 per child and adds a temporary credit of $500 for dependents that are not qualifying children of the taxpayer. In addition, the Tax Cuts and Jobs Act increases the thresholds for the phaseout of the credit from $75,000 (Single, Head of Household) and $110,000 (Married Filing Jointly) to $200,000 and $400,000 and increases the refundable portion of the credit.
Education Expenses. With respect to “qualified tuition programs” (i.e., 529 plan), the Tax Cuts and Jobs Act expands the definition of “qualified higher education expenses” that are excluded from gross income. Now distributions from “qualified tuition programs” include elementary or secondary public, private, or religious school, and certain expenses in connection with homeschooling.
The Tax Cuts and Jobs Act also excludes from gross income the cancellation of a student loan on account of a student’s death or total disability if such cancellation occurs after 2017 and before 2026. Although, at the current time, we are not recommending this as a viable planning strategy.
Alimony Payments. The Tax Cuts and Jobs Act permanently repeals the deduction for alimony payments and corresponding inclusion of such payments in gross income. Payments under divorce separation agreements executed or modified after 2018 between ex-spouses will neither be income to the recipient nor deductible to the payee.
Kyle maintains a general tax and transactional practice at Lane & Waterman, including tax planning, compliance, business and entity formation and structuring, mergers and acquisition, and estate planning. He received his Masters in Laws (LL.M.) degree in taxation, with honors, from Northwestern University School of Law and is admitted to practice law in Iowa and Illinois.
This article is designed and intended for general information purposes and should not be construed or relied upon as legal advice. Your individual situation will determine what is right for you and you should consult an attorney if specific legal information or advice is desired.