On Dec. 22, 2017, the Tax Cuts and Jobs Act became law and reshaped the U.S. tax landscape. While many provisions affect both individuals and businesses, this summary focuses on the individual changes likely to have the most impact for everyday taxpayers. It is not exhaustive or deeply technical but highlights key points to consider when planning your taxes. Future discussions can cover business, pass-through entity, and international tax changes in more detail.
Tax rates were adjusted for individuals. The lowest rate remains 10 percent, while the top rate was reduced from 39.6 percent to 37 percent. Most middle brackets are lower in 2018 than in 2017, and the income ranges for each bracket widened, reducing the chance of being pushed into a higher bracket as quickly.
At the same time, several deductions and exemptions were eliminated or limited. Personal exemptions were removed, and the standard deduction was increased to offset some of that change. Deductions for state and local taxes (including income and property taxes) are now capped at $10,000 per year. Miscellaneous itemized deductions such as tax preparation fees, investment advisory fees, employee business expenses, and many personal casualty losses are no longer deductible. Entertainment expenses, once widely deducted, are generally disallowed, though business-related meals remain 50 percent deductible.
Mortgage interest deductibility rules changed for new debt. Interest on acquisition debt incurred after Dec. 15, 2017, is limited to mortgage principal of $750,000. Refinances closed after that date are generally grandfathered at the prior $1 million limit only up to the balance at the refinance date, which means interest on cash-out refinancing above that amount will not be deductible. Interest on home equity lines of credit is deductible only to the extent the borrowed funds are used to buy, build, or substantially improve the home securing the loan.
Medical expense deductions were made slightly more generous for a limited period: qualifying medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income, down from the prior 10 percent threshold. The ceiling for cash contributions to qualified charities increased from 50 percent to 60 percent of AGI. The standard deduction for married couples filing jointly is now $24,000, and child tax credits were increased. Additionally, employees of private companies may have more flexibility with stock option income, as income from certain private company stock options can now be deferred for up to five years under limited circumstances.
Other changes will affect business owners and investors. Business loss deductions are limited: excess business losses for noncorporate taxpayers are capped at $500,000 per year for joint filers ($250,000 for single filers), with amounts above that carried forward as net operating losses (NOLs). Net operating losses can no longer be carried back, but they may be carried forward indefinitely, subject to a limitation that allows use only up to 80 percent of taxable income for losses arising in tax years beginning after 2017.
These changes apply at the federal level; state and local tax rules vary considerably. Many states are actively adjusting their tax codes in response to federal changes, and some states are more aggressive in asserting filing requirements. Business owners and frequent travelers should be especially mindful of nexus rules: a state may assert tax obligations based on where you sell goods or provide services, where you maintain employees, or other business activities. Receiving a notice from a state where you did not expect to have filing responsibilities can be costly and stressful.
Tax planning under the new rules requires attention to timing, documentation, and understanding both federal and state interactions. Consult a qualified tax professional to review how these changes affect your specific situation; proactive planning will usually save more time, expense, and stress than reactive compliance after the fact.