This blog will try to summarize the top changes made by the TCJA – Tax Cuts and Jobs Act. So what changed under the TCJA? – A lot of things but we will first look at those that have major impact on a wide section of the tax paying population.
Under the TCJA, standard deduction has doubled for all statuses mainly to indirectly prevent the widespread use of itemized deductions. Changes have also been made to specific itemized deductions. The amount of state and local taxes (both income and property) may not exceed $10,000 on an MFJ return. The mortgage interest deduction stands capped at $750,000 for loans taken out after December 15, 2017. This limit remains pegged at $1 million for mortgages established prior to said date.
The personal exemption has been completed eliminated from 2018 onwards and the doubling of the standard deduction offsets this elimination and provides a compensatory effect. The highest tax rate for individuals has been reduced from 39.6% to 37%.
The TCJA has also made significant changes to the Estate Tax and Gift Tax rules as well. Exemption under the estate tax has increased or rather almost doubled to $11.18 million per individual in 2018(in 2017 this limit was $5.49 Million). It is inflation adjusted and will be $11.4 million for tax year 2019. It should also be noted that this provisions is set to expire in 2025 and on Jan 1, 2026 the exemption amount will be back to $5 million plus the inflation adjustment.
In 2018, a US Individual can gift up to $15,000 per annum. Any gifts in excess of his amount will automatically reduce the $11.8 million gift tax lifetime exemption limit. For both the gift tax and the estate duty the lifetime exemption limit is the same – $11.18 Million for 2018. There are some gifts that do not reduce the exemption limit. These include:
- Tuition paid directly to an educational institution on behalf of a person
- Payments for a person’s medical care paid directly to hospital/health care provider
- Gifts to non-US spouse
Listed above are some of the top changes of the TCJA. Most of these changes are set to expire in 2025 and will revert to pre TCJA levels/limits. On the contrary the business tax changes do not have a sunset clause. The individual provisions are justifiably temporary to ensure that the revenue cost is not heavy.