IN THE LAST TWO ISSUES, we discussed the tax law changes that impact corporations and addressed international tax law changes. This month’s column focuses on the tax law changes that affect individuals. One of the most notable alterations in the 2018 tax law is the change to individual tax brackets. The top marginal rate is 37 percent in 2018, down from 39.6 percent in 2017. In addition, the bracket thresholds were widened so each rate applies to a larger range of taxable income, which means it generally takes more income to reach the top bracket.
Another major change for 2018 is the elimination of the personal exemption. State and local tax deductions (SALT) — including state and local income taxes, real estate taxes, and certain other property taxes — remain deductible but are now capped at $10,000 per year. For many taxpayers, this cap will be significant because combined state and local taxes often exceed that limit. Several itemized and miscellaneous deductions were also removed: tax preparation fees, investment advisory fees, unreimbursed employee business expenses, most moving expense deductions, and business entertainment deductions are no longer deductible. Business-related meal expenses, however, remain 50 percent deductible, so dining while traveling for work or hosting business meals will still receive partial tax relief.
Changes to family law provisions also affect taxes. Beginning in 2018, alimony payments are no longer deductible by the payor, and alimony is not included in the recipient’s taxable income. This shift alters tax outcomes for many divorcing or divorced couples and should be considered during settlement planning.
The new law also revised rules around mortgage interest. If your mortgage existed on Dec. 15, 2017, the previous rules generally continue to apply. For mortgages originated after that date, the deductible mortgage interest is limited to mortgage debt secured by a primary or secondary residence up to $750,000 of acquisition indebtedness. Refinances on that date are treated differently: refinancing after Dec. 15, 2017, can be recognized up to the original debt level, with limits effectively tied to the original $1 million cap for certain refinances. Interest on home equity lines of credit is deductible only when the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
There are some taxpayer-friendly changes as well. Medical expenses remain deductible, and for 2018 the floor was temporarily reduced to expenses that exceed 7.5 percent of adjusted gross income (AGI), down from the prior 10 percent threshold. The standard deduction was nearly doubled for 2018 to $24,000 for married couples filing jointly, which offsets the loss of personal exemptions for many households. For individuals who operate their own businesses, the new rules limit allowable business losses; excess losses are subject to an annual cap and may be carried forward. Specifically, business losses for noncorporate taxpayers are restricted so that net operating losses can only offset up to 80 percent of taxable income in future years, and certain immediate loss deductions are limited to $500,000 for qualifying pass-through owners in a given year, with excess carried forward under net operating loss rules.
In summary, the 2018 tax law brings a mix of changes that will benefit some taxpayers and disadvantage others. The net effect for many households will depend on individual circumstances such as income level, state and local tax burden, mortgage status, business ownership, and medical expenses. Because specific rules and guidance may continue to evolve, it is important to consult your tax advisor and review your situation proactively so you can plan under the current framework and adapt as additional regulatory clarity is released.