by Richard Page
Except for three provisions, all of the new tax changes included in the recently passed Tax Cuts and Jobs Act (TCJA) go into effect beginning in 2018 or beyond.
The changes applicable for 2017 federal returns are:
- The adjusted gross income threshold for medical expenses on Schedule A will be 7.5% for all taxpayers for 2017 and 2018.
- 100% of bonus depreciation is eligible for qualifying assets purchased after September 27, 2017.
- The home mortgage interest deduction is limited to no more than $750,000 of principle residence acquisition indebtedness for loans incurred beginning after December 14, 2017. The limit is $1,000,000 for loans incurred before December 15, 2017.
For now, many individual changes are generally effective for tax years beginning after December 31, 2017 and before January 1, 2026.
There are seven tax brackets with wider taxable income spreads and the highest rate applies at taxable income of $600,000 for married filing jointly and $500,000 for single and/or head of household filing status.
Trust tax rates are 10%, 24%, 35% and 37%, beginning I 2026 and the unearned income of a child is taxed at thrust rates, rather than the tax rates applicable to the parents.
Exemptions are suspended as a deduction to 2026. The Child tax credit is increased to $2,000 ($1,400 refundable) for qualifying children under 17 and a $500 credit is available for other dependents. Phase-out is increased to begin at $400,000 MFJ and $200,000 single and HOH and no credit is allowed unless a SSN of child is provided and ITINs are no longer accepted.
The standard deduction is increased to $12,000 for a single taxpayer, $18,000 HOH, and $24,000 MFJ. The law suspends all misc. itemized deduction that are subject to the 2% of AGI limitation, including employee business expenses, tax preparation fees, investment advisor fees, legal fees, etc.
A charitable contribution limitation on cash contributions to public charities and certain private foundation is increased to 60% of AGI versus the 50% and suspends a charity deduction for amounts paid for college athletic seating rights.
Mortgage interest suspends (new and old) equity debt interest deduction and reduces acquisition debt from $1,000,000 to $750,000 for debt incurred after 12/15/2017.
State and local taxes are suspended for all Schedule A individual state and local tax, sales tax and property tax deductions above $10,000 and the Bill specifically prohibits deduction for prepaid 2018 state income taxes.
Gambling losses are limited to gambling winnings for professional gamblers too.
Personal casualty loss deductions except for presidentially declared casualty losses are suspended as an itemized deduction.
The IRS released new tax tables to reflect the increase in the standard deduction, the repeal of personal exemptions, new tax rates and bracket which can be implemented now or around February 2018 for the recently passed TCJA.
The Act retains the teacher deduction of $250, the adoption and earned income credit and the educational and tuition loan plan deductions. Capital gain rates are retained with increased taxable income threshold for single, HOH and MFJ filers.
California will not conform to most of the provisions in the Tax Cuts and Jobs Act without specific legislation. Generally, changes in federal law do not automatically change state law. The Legislature first reviews the federal changes and modifies the specific date before any federal changes become effective, or enacts “spot” a conformity bill that conforms to a specific provision. In simple terms, if a federal law is retroactively enacted after the specified date, the change is generally not incorporated for California purposes. There are some limited exceptions: most retirement benefit provisions, “S” corporation formation, termination provisions, and filing status provisions are usually automatic.
Because the TCJA makes significant changes to personal itemized deductions and standard deduction amounts (among other things), we are likely to have significant Schedule CA adjustments for the 2018 California returns. Hopefully the FTB will develop a Schedule A to be used for California tax purposes to quantify the differences between the federal and state individual income tax returns.