On December 20, 2017, Congress passed comprehensive tax reform legislation (the “Act”) and the President signed the bill into law on December 22, 2017. The Act makes significant changes to the taxation of individuals and corporations. We have already contacted our tax preparation clients to discuss the impact of the changes and year-end planning issues. If you are not a Pennsylvania Trust tax client, we encourage you to immediately contact your own tax professional to discuss the Act’s impact on your personal tax situation.
The following is a brief overview of the changes affecting individual taxpayers:
- Tax Rates: The maximum tax rate for individuals is reduced to 37%, with the following brackets:
- AMT: The Alternative Minimum Tax (AMT) exemption amounts are increased, and any reduction does not occur until the AMT income is over $1 million for joint returns and surviving spouses, and $500,000 for all other taxpayers.
- Standard Deduction/Personal Exemptions: The standard deduction is increased to $24,000 (married), and $12,000 (individual), and personal exemptions are repealed.
- State and Local Taxes: The individual deduction for state and local income, sales and property taxes is limited, in the aggregate, to $10,000. Note that a taxpayer who attempts to pay 2018 state and local income taxes in 2017 cannot claim an itemized deduction in 2017 for such prepaid income tax.
- Mortgage Interest: An itemized deduction is allowed for interest on a principal residence and second residence mortgages up to a total of $750,000. Mortgages in place prior to 12/16/17 are grandfathered. Interest on a Home Equity Line of Credit (HELOC) is no longer deductible.
- Medical Expenses: The Act includes a short-term reduction in the medical expense deduction threshold floor from 10% of AGI to 7.5% of AGI.
- Deduction for Personal Casualty & Theft Losses: The deduction is suspended, except for personal casualty and losses incurred in a federally-declared disaster.
- Miscellaneous Itemized Deductions: The Act eliminates miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees, and unreimbursed employee business expenses).
- Capital Gains: No change in the capital gains rates. Individuals can continue to exclude gain of up to $500,000 (for joint filers) from the sale of primary residence.
- 529 Plans: In addition to distributions for higher education costs, distributions can now be made up to $10,000/year per student for tuition at an elementary or secondary public, private or religious school.
- Pass-Through Entities: New 20% deduction reducing taxable income is allowed for qualified business income from partnerships, limited liability companies, S corporations and sole proprietorships. The deduction is not available for specified service businesses.
- Charitable Deductions: Cash gifts to public charities are now deductible up to 60% of the taxpayer’s Adjusted Gross Income(AGI), an increase from 50% of the taxpayer’s AGI.
- Estate & Gift Exemptions: The exemptions have doubled to $ 11.2 million per individual ($22.4 per married couple).
- Child Tax Credit: The credit increases to $2,000 per qualified child, with $1,400 being refundable.
Please don’t hesitate to contact your Pennsylvania Trust relationship team with any questions you might have about the impact of tax reform on your planning goals.
by Leslie Gillin Bohner, Esq.
Ms. Bohner is Senior Vice President and Chief Fiduciary Officer at Pennsylvania Trust.