Tax reform: How the 2017 tax law may impact you

Analysts at Ameriprise Financial have identified some areas that may affect taxpayers now and in the future.

Tax rates and brackets

The 2017 law reduces tax rates and adjusts income brackets for taxpayers, including individual filers and married couples filing jointly. However, the number of individual tax brackets remains at seven. The number of estate and trust brackets is reduced from five to four brackets, also with slightly lower rates. The 2017 tax law generally retained the preferential treatment of long-term capital gains. However, changes were made to the taxable income breakpoints between rates.

The new tax rates and brackets currently apply from 2018 through 2025.

2018 Filing Status & Taxable Income Range
Tax Rate Single Married Filing Jointly & Surviving Spouse Married Filing Separate Head of Household Trust
10% 0-9,525 0-19,050 0-9,525 0-13,600 0-2,550
12% 9,525-38,700 19,050-77,400 9,525-38,700 13,600-51,800 NA
22% 38,700-82,500 77,400-165,000 38,700-82,500 51,800-82,500 NA
24% 82,500-157,500 165,000-315,000 82,500-157,500 82,500-157,500 2,550-9,150
32% 157,500-200,000 315,000-400,000 157,500-200,000 157,500-200,000 NA
35% 200,000-500,000 400,000-600,000 200,000-300,000 200,000-500,000 9,150-12,500
37% 500,000+ 600,000+ 300,000+ 500,000+ 12,500+

Standard deduction vs. more limited itemized deductions 

The new law nearly doubles the standard income tax deduction for individuals to $12,000 (up from $6,350 in 2017), and to $24,000 (up from $12,700 in 2017) for married couples filing jointly. For taxpayers who have previously itemized their deductions, the increased standard deduction – as well as changes to itemized deductions – may make itemizing less attractive in 2018 for some.  

Taxpayers should consider the impact of changes to itemized deductions made in the new law. These changes are generally set to expire after 2025.

  • The aggregate deduction for state and local property taxes plus income taxes (or sales tax if elected) is generally limited to $10,000, beginning in 2018.
  • Charitable donation deductions remain in place. The increasing limits for cash contributions to public charities was increased from 50% to 60% of adjusted gross income (AGI).
  • Mortgage interest deductions largely remain under previous rules. However, for acquisition indebtedness incurred after Dec. 14,2017, the $1,000,000 acquisition debt limitation is reduced to $750,000. Limited deductions are allowed for interest paid on home equity loans for 2018 through 2025.
  • Medical expense deductions are retained. For 2017 and 2018 the deduction applies to expenses in excess of 7.5% of AGI. Beginning in 2019 the threshold increases to 10% of AGI unless Congress acts. 
  • Miscellaneous itemized deductions that are subject to the 2% of AGI floor are not allowed for 2018 through 2025, including:
    • Unreimbursed employee business expenses (e.g., travel expenses, home office expenses)
    • Investment fees and expenses
    • Tax preparation fees

Personal exemptions and child tax credit

Under the 2017 tax law, personal exemptions are eliminated for 2018 through 2025. However, during the same time, the child tax credit is increased to $2,000 per qualifying child with a $500 credit for qualifying dependents other than qualifying children.

Other changes

  • Recharacterization of ROTH conversions: Under the TCJA, “recharacterizing” a Roth conversion that occurs in 2018 is no longer possible. Recharacterizing Roth conversions that occurred in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by Oct. 15, 2018. Recharacterizing Roth contributions to traditional IRA contributions and vice versa would continue to be permitted.
  • Education savings/deductions:The tax advantages of 529 plans expand to K-12 education, allowing for tax-free withdrawals of up to $10,000 annually from qualified education savings accounts for tuition. While the new law expands the definition of “qualified higher education expenses” for purposes of federal tax law, individual states have their own rules for purposes of state tax law. Many states incorporate part or all of the federal tax code but it is uncertain how states will incorporate all the provisions of the tax law. Taxpayers should check with their tax advisor.
  • Estate, Gift, and GST taxes: The federal transfer taxes are retained, but with an approximately double exclusion amount applicable for 2018 through 2025.  
  • 20% Deduction for Certain Pass-through Business Income: The law provides a tax deduction for individuals, trusts and estates who own certain businesses operating as pass-through entities (sole proprietorships, partnerships, S corporations, and most LLCs). Eligible taxpayers can deduct up to 20% of the taxpayer’s allocable share of qualified pass-through business income, subject to limitations. The rules around this provision are complex and depend on individual circumstances. Work with your tax advisor to determine if you may be able to take advantage of this provision.

Contact your tax advisor if you have questions about the 2017 tax law, and how it could affect you, and see your financial advisor. Though your Ameriprise financial advisor cannot provide specific tax advice, they can work with your tax advisor to help you understand the general impacts of the proposed legislation, or refer you to a tax advisor if you don’t already work with one.