Question

l LTE 2:41 PM Module 2 Discussion The 2017 Tax Cuts and Jobs Act ("TCJA") is the most significant overhaul to the Internal Revenue Code since 1986. You can get a brief overview of the TCJA here. Everything you'll be learning in this course is in accordance with the new laws that are effective beginning this tax year (2018); however, l'd like you to consider certain differences when compared to the prior law to get a better understanding of the changes that have taken place. Group 1: Last Name begins with A-M One significant change is that the TCJA has eliminated personal and dependency exemptions. A few other changes enacted to counteract this change include raising the standard deduction and increasing the child tax credit. Personal and dependency exemptions were fixed deductions provided for taxpayers, their snouses and denendents The Start Thread LTE 2:41 PM Module 2 Discussion Group 1: Last Name begins with A- M One significant change is that the TCJA has eliminated personal and dependency exemptions. A few other changes enacted to counteract this change include raising the standard deduction and increasing the child tax credit. Personal and dependency exemptions were fixed deductions provided for taxpayers, their spouses and dependents. The exemption amount in 2017 was $4,050 per person. So for example, a married couple with two children that qualified as dependents would have deducted $16,200 ($4,050 x 2) from Adjusted Gross Income in 2017 What are the potential pros and cons of this particular change? Consider varying family sizes. Think about both the implications to the taxpayer as well as to the IRS. Start Thread

Answer 1

On December 22, 2017, the most sweeping tax legislation since the Tax Reform Act of 1986 was signed into law. The Tax Cuts and Jobs Act of 2017 (TCJA) makes small reductions to income tax rates for most individual tax brackets and significantly reduces the income tax rate for corporations. It also provides a large new tax deduction for owners of pass-through entities and significantly increases individual alternative minimum tax (AMT) and estate tax exemptions. And it makes major changes related to the taxation of foreign income.

It’s not all good news for taxpayers, however. The TCJA also eliminates or limits many tax breaks, and much of the tax relief is only temporary.

Here is an overview of some of the key changes affecting individual and business taxpayers.

INDIVIDUALS

The TCJA includes significant changes for individual taxpayers, most of which take effect for 2018 and expire after 2025. Here are some of the most notable changes.

Personal exemptions and standard deduction

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. In addition, they can either itemize deductions or take a standard deduction based on their filing status: $6,350 for singles and married couples filing separately, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

For 2018–2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many depen- dents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from the family tax credits.

Family tax credits

Tax credits are especially valuable because they reduce your tax bill dollar-for-dollar, rather than just reducing the amount of income subject to tax like deductions do. Beginning in 2018, the TCJA dou- bles the child credit to $2,000 per child under age 17. The maximum amount refundable (because a taxpayer’s credits exceed his or her tax liability) is limited to $1,400 per child.

The TCJA also makes the child credit available to more families than in the past. Under the new law, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000. The thresholds won’t be indexed for inflation, though, meaning the credit will lose value over time.

The TCJA also includes, beginning in 2018, a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child or elderly parent).

These provisions all expire after 2025.

Above-the-line deductions

Above-the-line deductions are deductions you can take even if you don’t itemize. They’re subtracted from your income to determine your adjusted gross income (AGI). AGI affects eligibility for many tax breaks and can trigger certain taxes. The TCJA makes some significant changes to two above-the- line deductions:

1. Moving expenses. The deduction for work-related moving expenses is suspended for 2018–2025, except for active-duty members of the Armed Forces (and their spouses or dependents) who move because of a military order that calls for a permanent change of station. (For 2018–2025, the exclusion from gross income and wages for qualified moving expense reimbursements is also suspended, again except for active-duty members of the Armed Forces who move pursuant to a military order.)

2. Alimony payments. For divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recip- ient’s taxable income. Because the recipient spouse would typically pay income taxes at a rate lower than that of the paying spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.

Itemized deductions

When you file your tax return, you can either claim the standard deduction or you can itemize deductions. The TCJA limits or suspends many itemized deductions. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. With the TCJA’s near doubling of the standard deduction for 2018 and reduction of itemized deduction benefits overall, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

Here’s a closer look at the TCJA changes to itemized deductions:

• State and local tax deduction. The deduction for state and local taxes had been proposed for elimination under tax reform. It survived but has been scaled back substantially. For 2018–2025, taxpayers can claim a deduction of no more than $10,000 for the aggregate of state and local prop- erty taxes and either income or sales taxes.
• Mortgage interest deduction. The TCJA tightens limits on the deduction for home mortgage interest. For 2018–2025, it generally allows a taxpayer to deduct interest only on mortgage debt of up to $750,000. However, the limit remains at $1 million for mortgage debt incurred before December 15, 2017, which will significantly reduce the number of taxpayers affected.
• Home equity interest deduction. The new law suspends the deduction for interest on home equity debt for 2018–2025. However, home equity debt interest might still be deductible if the funds are used for a purpose where interest otherwise may be deductible, such as for home-improvement, investment or business purposes. The rules are complex and the new law is still being interpreted.
• Medical expense deduction. Qualified medical expenses are deductible only to the extent they exceed the applicable AGI threshold. The TCJA reduces the threshold from 10% of AGI to 7.5% for all taxpayers for both regular and AMT purposes in 2017 and 2018.
• Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018–2025. If you’re an employee and work from home, this includes the home office deduction.
• Personal casualty and theft loss deduction. For 2018–2025, this deduction is suspended except if the loss was due to an event officially declared a disaster by the President.
• Charitable contribution deduction. For 2018–2025, the limit on the deduction for cash donations to public charities is raised to 60% of AGI from 50%. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated.
• Elimination of the AGI-based reduction of certain itemized deductions. Under pre-TCJA law, if your AGI exceeded the applicable threshold, certain deductions were reduced by 3% of the AGI amount over the threshold (not to exceed 80% of otherwise allowable deductions). For 2018–2025, the reduction is suspended.