Chapter 1: New Legislation — Individual Concerns

2018 Workbook

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Chapter 1: New Legislation -- Individual Concerns

Tax Cuts and Jobs Act: Individual Taxpayer Provisions................................ A2

Taxes and Returns............................................. A2 Income and Exclusions .................................... A11 Deductions and Credits .................................. A14 Relief for Disaster Losses ............................... A24 ABLE Accounts ............................................... A26 Tax Cuts and Jobs Act: Trusts and Estates ........... A28 Introduction..................................................... A28 Tax Rates and Brackets .................................. A28 Special Deductions in Lieu of Personal Exemptions ...................................... A29 Miscellaneous Itemized Deductions .............. A30 Qualified Business Income Deduction .......... A31

Changes to Electing Small Business Trusts (ESBT) .................................................. A33

Estate and Gift Tax Changes .......................... A34

Bipartisan Budget Act of 2018 ............................... A36

Extenders.......................................................... A36

Improper Levy on Retirement Plans ............. A36

Modification of User Fees for Installment Agreements ............................ A37

New Tax Form for Seniors .............................. A37

Hardship Distributions.................................... A37

Tax Home for Individuals Serving in Combat Zone ................................. A38

Tax Relief for California Wildfire Disaster Area..................................... A38

Other Provisions .............................................. A40

Please note. Corrections were made to this workbook through January of 2019. No subsequent modifications were made. For clarification about acronyms used throughout this chapter, see the Acronym Glossary at the end of the Index.

For your convenience, in-text website links are also provided as short URLs. Anywhere you see uofi.tax/xxx, the link points to the address immediately following in brackets.

About the Authors

Carolyn Schimpler, CPA, is Assistant Director, Tax Materials, at the University of Illinois Tax School. She joined Tax School in 2008, after holding a variety of positions in public accounting and private industry. She graduated with honors from Governors State University in 1988 and passed the CPA examination later that year. Carolyn serves as editor of the annual Federal Tax Workbook. She is a member of the Illinois CPA society.

Marc C. Lovell, JD, LLM, MS, has headed a private tax law practice since 2001 with principal practice areas in federal, state, local and international taxation and tax litigation. He served as Assistant Director, Tax Education and Outreach of the University of Illinois Tax School program from 2011 to 2016. In addition to his private practice, Marc heads a team of seven research and reference law librarians at the Department of Justice and the DOJ Main Library in Washington DC as a contractor through The Cadence Group. Marc obtained his JD and LLM from Wayne State University Law School, and his MS in Library and Information Science from the University of Illinois.

Other chapter contributors and reviewers are listed at the front of this volume.

2018 Volume A -- Chapter 1: New Legislation -- Individual Concerns

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Copyrighted by the Board of Trustees of the University of Illinois. This information was correct when originally published. It has not been updated for any subsequent law changes.

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TAX CUTS AND JOBS ACT: INDIVIDUAL TAXPAYER PROVISIONS1

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The TCJA decreases individual income tax rates and lowers the top individual rate from 39.6% to 37%. It temporarily repeals many individual deductions and credits and increases others. Two significant changes include temporarily repealing personal exemptions and temporarily increasing the standard deduction. The TCJA also doubles the exemption amount for the estate and gift tax. Most of the changes to the taxation of individuals are effective for tax years beginning after December 31, 2017 and ending before January 1, 2026.2

Note. The time period during which the TCJA is in effect (tax years beginning after December 31, 2017 and ending before January 1, 2026), is referred to as the TCJA period in this section. At the time these materials were prepared, legislation was being discussed that would make many of the individual changes permanent.

The following material summarizes the most significant provisions in the TCJA that affect individual taxpayers.

Note. The TCJA also makes significant changes to business income taxation. These changes are explained in the 2018 University of Illinois Federal Tax Workbook, Volume B, Chapter 1: New Legislation -- Business Concerns.

TAXES AND RETURNS

Income Tax Rates

Old Law. Seven income tax rates apply to individual taxpayers. These rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. New Law. The 2018 tax rates are shown in the following tables.

Single Taxpayers

Income Range

$0 to $9,525 Over $9,525 but not over $38,700 Over $38,700 but not over $82,500 Over $82,500 but not over $157,500 Over $157,500 but not over $200,000 Over $200,000 but not over $500,000 Over $500,000

Tax Rate

10% 12% 22% 24% 32% 35% 37%

1. Joint Explanatory Statement of the Committee of Conference. [docs.billsthisweek/20171218/Joint%20Explanatory%20 Statement.pdf] Accessed on Jan. 4, 2018; The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law. Sherlock, Molly F. and Marples, Donald J. Feb. 6, 2018. Congressional Research Service. [sgp/crs/misc/R45092.pdf] Accessed on Feb. 14, 2018.

2. Joint Committee on Taxation, Macroeconomic Analysis of the Conference Agreement for H.R. 1, the "Tax Cuts and Jobs Act" (JCX-69-17), Dec. 22, 2017.

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2018 Volume A -- Chapter 1: New Legislation -- Individual Concerns

Copyrighted by the Board of Trustees of the University of Illinois.

This information was correct when originally published. It has not been updated for any subsequent law changes.

2018 Workbook

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Heads of Household (HoH)

Income Range

$0 to $13,600 Over $13,600 but not over $51,800 Over $51,800 but not over $82,500 Over $82,500 but not over $157,500 Over $157,500 but not over $200,000 Over $200,000 but not over $500,000 Over $500,000

Tax Rate

10% 12% 22% 24% 32% 35% 37%

Married Filing Joint Returns (MFJ) and Surviving Spouses

Income Range

$0 to $19,050 Over $19,050 but not over $77,400 Over $77,400 but not over $165,000 Over $165,000 but not over $315,000 Over $315,000 but not over $400,000 Over $400,000 but not over $600,000 Over $600,000

Tax Rate

10% 12% 22% 24% 32% 35% 37%

Married Filing Separate Returns (MFS)

Income Range

$0 to $9,525 Over $9,525 but not over $38,700 Over $38,700 but not over $82,500 Over $82,500 but not over $157,500 Over $157,500 but not over $200,000 Over $200,000 but not over $300,000 Over $300,000

Tax Rate

10% 12% 22% 24% 32% 35% 37%

Trusts and Estates

Income Range

$0 to $2,550 Over $2,550 but not over $9,150 Over $9,150 but not over $12,500 Over $12,500

Tax Rate

10% 24% 35% 37%

The rate structures shown in these tables do not apply to tax years beginning after the TCJA period. The 3.8% tax on net investment income remains in effect.

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Copyrighted by the Board of Trustees of the University of Illinois. This information was correct when originally published. It has not been updated for any subsequent law changes.

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Capital Gains Rates

Old Law. Capital gains and qualified dividends are taxed at the following rates for individual taxpayers.

Taxpayer's Regular Income Tax Rate

10% or 15% 25%, 28%, 33%, or 35% 39.6%

Capital Gain Rate

0% 15% 20%

New Law. The tax rates on net capital gains and qualified dividends are generally unchanged. The breakpoints between the 0% and 15% capital gains rates are based on the same amounts as the breakpoints in effect before passage of the TCJA. These breakpoints have been indexed for inflation. The 0%, 15%, and 20% capital gains rates apply to taxpayers with taxable income in the ranges shown in the following table.3

Filing Status

MFJ or surviving spouse HoH MFS All other individuals Estates and trusts

0%

$0 $77,200 0 51,700 0 38,600 0 38,600 0 2,600

15%

$77,201 $479,000 51,701 452,400 38,601 239,500 38,601 425,800 2,601 12,700

20%

Over $479,000 Over 452,400 Over 239,500 Over 425,800 Over 12,700

Alternative Minimum Tax

Old Law. An alternative minimum tax (AMT) is imposed on individual taxpayers in an amount by which the tentative minimum tax exceeds the regular income tax for the tax year. Individuals are allowed to exempt a certain amount of income from AMT. For tax years beginning in 2017, the AMT exemption amounts are:

? $84,500 for MFJ taxpayers and surviving spouses,

? $54,300 for single taxpayers and HoH, and

? $42,250 for MFS taxpayers.

For tax years beginning in 2017, the exemption amounts are phased out by 25% of the amount by which the individual's alternative minimum taxable income (AMTI) exceeds:

? $160,900 for MFJ taxpayers and surviving spouses,

? $120,700 for single taxpayers and HoH, and

? $80,450 for MFS taxpayers.

A taxpayer's AMTI is calculated by increasing the taxpayer's taxable income by certain preference items and is further modified by AMT adjustments. These adjustments include, but are not limited to, the following.

? Miscellaneous itemized deductions are not allowed.

? Itemized deductions for state and local taxes are not allowed.

? The standard deduction and the deduction for personal exemptions are not allowed.

3. IRC ?1(j)(5)(B).

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2018 Volume A -- Chapter 1: New Legislation -- Individual Concerns

Copyrighted by the Board of Trustees of the University of Illinois.

This information was correct when originally published. It has not been updated for any subsequent law changes.

2018 Workbook

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New Law. For years within the TCJA period, the AMT exemption is increased to:

? $109,400 for MFJ taxpayers and surviving spouses,

? $70,300 for single taxpayers and HoH, and

? $54,700 for MFS taxpayers.

The income phaseout thresholds for the AMT exemption are increased to:

? $1 million for MFJ taxpayers and surviving spouses, and

? $500,000 for all other taxpayers.

The AMT exemption and income phaseout amounts are indexed for inflation.

As discussed later, miscellaneous itemized deductions subject to the 2% floor are not allowed for regular tax purposes

for tax years in the TCJA period. Therefore, no further adjustment for such expenses is needed for purposes of calculating AMT. 4

Note. For 2018, the exemption amount for trusts and estates is $24,600, and the phaseout threshold is $500,000.4

Note. The corporate AMT is completely repealed for tax years beginning after December 31, 2017. For more information, see the 2018 University of Illinois Federal Tax Workbook, Volume B, Chapter 1: New Legislation -- Business Concerns.

Kiddie Tax

Old Law. A "kiddie tax" is imposed on the net unearned income of certain children. The kiddie tax applies if: 5

? The child is either under age 18 by the end of the tax year, is under age 19 and does not provide more than half of their own support with their earned income, or is a full-time student under age 24 and does not provide more than half of their own support with their earned income;

? Either of the child's parents is alive at the end of the tax year;

? The child's unearned income exceeds $2,100 (for 2017); and

? The child does not file a joint return.

Under the kiddie tax rules, the child's net unearned income (unearned income over $2,100 for 2017) is taxed at the parents' tax rates if the parents' tax rates are higher than that of the child. The rest of a child's taxable income is taxed at the child's rates. 6

Note. A dependent who has both earned and unearned income generally must file a return if the dependent's gross income is the greater of $1,050, or $350 plus the dependent's earned income, up to a maximum of $6,350 for 2017.6 This is the amount of the dependent's standard deduction.

4. Rev. Proc. 2018-18, 2018-10 IRB 392. 5. IRC ?1(g). 6. IRS Pub. 929, Tax Rules for Children and Dependents.

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Copyrighted by the Board of Trustees of the University of Illinois. This information was correct when originally published. It has not been updated for any subsequent law changes.

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