In addition to a number of business tax changes, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) added a number of important changes for individuals as follows. The changes discussed are not all of the changes for individuals.
- The maximum tax bracket has been reduced from 39.6% to 37%. Each bracket has been reduced.
- The standard deduction has been increased from $6,500 for an individual and $13,000 filing jointly to $12,000 and $24,000, respectively—meaning you will need $24,000 in itemized deductions in order for itemizing to make sense.
- The personal exemption for each taxpayer and dependent has been “suspended” through 2025.
- The 3.8% tax on net investment income and the .9% additional Medicare tax on payroll and self-employment income remain intact.
- The Obamacare individual mandate was effectively repealed by reducing the applicable rate to zero. There is no compulsion to obtain insurance or to obtain insurance that complies with Obamacare coverage requirements.
- Individuals now face a limitation in deducting state and local taxes not incurred in conducting a business or an activity for profit. The non-business state and local tax deduction is now limited to $10,000.
- Mortgage interest may only be deducted to the extent that it accrued on $750,000 or less of mortgage loan principal. Interest accrued on debt incurred or contracted to be incurred before December 15, 2017, is not subject to the limitation. Homeowners will have be very careful before refinancing a mortgage loan. Interest on home equity lines will not be deductible.
- The charitable deduction limit has been raised from 50% of adjusted gross income to 60% of adjusted gross income.
- There is no longer a charitable deduction for fees paid to a college for athletic event seating rights.
- For divorce agreements entered into after 2018, alimony will no longer be deductible by the payor or includible by the recipient.
- Miscellaneous itemized deductions, formerly subject to a floor of 2% of adjusted gross income, are now nondeductible.
- The exclusion from income for qualified moving expenses is generally repealed except for active duty military personnel.
- The child care credit is increased to $2,000 from $1,000, with up to $1,400 per child treated as a refundable credit.
- Other than for losses incurred in a federally declared disaster area, the deduction for casualty and theft losses is limited to gains from casualties and thefts. In effect, the deduction is only allowed for casualties in federally declared disaster areas and to shelter insurance recoveries for thefts and casualties.
- An individual’s excess business loss is subject to limitations on deductibility. An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly and $250,000 for other individuals. Excess business loss is computed after applying the passive loss rules of Section 469.
- Qualified equity grants. A qualified equity grant is stock of a corporation that is not publicly traded if the corporation has adopted a plan to distribute options or restricted stock units to at least 80% of its employees. A qualified employee may elect to defer income attributable to the value of the stock until the earliest of any of the following:
(1) The first date the qualified stock becomes transferable, including, solely for this purpose, transferable to the employer.
(2) The date the employee first becomes an “excluded employee” (i.e., an individual: (a) who is one-percent owner of the corporation at any time during the 10 preceding calendar years; (b) who is, or has been at any prior time, the chief executive officer or chief financial officer of the corporation or an individual acting in either capacity; (c) who is a family member of an individual described in (a) or (b); or (d) who has been one of the four highest compensated officers of the corporation for any of the 10 preceding tax years. [This requirement may well limit the availability of the deferral in many cases.]
(3) the first date on which any stock of the employer becomes readily tradable on an established securities market;
(4) the date five years after the first date the employee's right to the stock becomes substantially vested; or
(5) the date on which the employee revokes his or her election. (Code Sec. 83(i)(1)(B), as amended by Act Sec. 13603(a))
- New carried interest rule. In order to obtain long term capital gain treatment for an interest in a partnership (including an LLC) received for services, the manager must hold the interest for at least three years, not the usual one year. The new rule applies to partnerships (and LLCs) engaged in acquiring securities, commodities, real estate, cash, options or derivative contracts.
- The estate and gift tax unified lifetime exemption for decedents dying in 2018 is increased from $5 million to $11.2 million. With proper estate planning, a married couple with up to $22.4 million in value in their taxable estates may avoid the federal estate tax. The exemption amount is indexed to increase with inflation. At present, California does not have an estate tax.
Michael Shaff joined the firm in 2011 as Of Counsel. He is the chairperson of the Tax Practice Group. Michael specializes in all aspects of federal income taxation. Mr. Shaff has served as a trial attorney with the office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past chair of the Tax Section of the Orange County Bar Association. He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group.
For more information about our Tax & Estate Planning Practice or questions on how the new Tax Law will affect your business contact Michael Shaff at