2018 Tax Reform - Summary of Changes

The following information is a summary of the tax reform provisions in 2018 that affect most returns. Click on a topic below to learn more.

Read H.R.1 - 115th Congress (2017 - 2018): An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 for all tax reform changes.

Title I - Individual tax reform

Tax rates

New income tax rates and brackets:

Individuals' taxable income will be subject to seven tax brackets, taxed at 10%, 12%, 22%, 24%, 32%, 35%, and 37% marginal rates. Simplification of the kiddie tax: not affected by child's parent or unearned income of siblings - and taxed at estates/trust rates), retains cap gains rates,  and adds preparer due diligence requirement for Head of Household filing status ($500 penalty). Estate/Trust subject to four tax brackets, 10%, 24%, 35%, and 37%

Standard deduction:

Increased to:

$24,000 - MFJ, QW
$18,000 - HOH
$12,000 - Single, MFS
Elderly / Blind - Unchanged

Personal exemptions:

Deduction for personal exemptions is effectively suspended because the statutory exemption amount is reduced to zero. A number of corresponding changes are made throughout the Code where specific provisions contain references to the statutory personal exemption amount; in each of these instances, the dollar amount to be used is $4,150, as adjusted by inflation. These include Code Sec. 642(b)(2)(C) , (Code Sec. 642(b)(2)(C)) (exemption deduction for qualified disability trusts), Code Sec. 3402 (wage withholding exception for 2018), and Code Sec. 6334(d) (property exempt from levy).

Kiddie tax changes (8615):

Children with unearned income over $2,100 required to file Form 8615 are no longer taxed at their parents' tax rate. Instead, they will be taxed at fiduciary rates.

• Earned income taxed at single rates
• Unearned income taxed at trust & estate rates

2018 estate and trust income tax rates for unearned income over $2,100:

2018 tax rates for child's long-term capital gains and qualified dividends:

State conformity:
California and Hawaii continue to calculate tax based on parents' and siblings' rates.

Treatment of business income of individuals, trusts, and estates

Qualified Business Income Deduction:

The Tax Cuts and Jobs Act adds a new deduction for non-corporate taxpayers for qualified business income. The deduction reduces taxable income and is generally 20% of a taxpayer's qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to the trade or business. Certain types of investment-related items are excluded from QBI, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business).

Taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return) are subject to limitations based on the W-2 wages and the adjusted basis in acquired qualified property. For service related businesses, there is a separate phase-out if taxable income exceeds the threshold amount.

The deduction is taken for partnerships and S corporations at the partner or shareholder level. Trusts and estates are eligible for the deduction. W-2 wages and the adjusted basis in acquired qualified property are apportioned between the trust or estate and the beneficiaries. Specified agricultural or horticultural cooperatives are also eligible for the deduction under special rules. Qualified business income includes only income effectively connected with a U.S. trade or business (or Puerto Rico if all the income is subject to US tax).

The deduction is intended to reduce the tax rate on qualified business income to a rate that is closer to the new corporate tax rate.

Exclusions and adjustments

Exclusion of qualified moving expense reimbursement:

For taxable years beginning after December 31, 2017 and before January 1, 2026 the deduction for moving expenses and the exclusion for qualified moving expense reimbursement is suspended, except for members of the Armed Forces of the United States on active duty who move pursuant to a military order and incident to a permanent change of station .

Exclusion for discharge of certain student loan indebtedness:

Certain student loans that are discharged on account of death or total and permanent disability of the student are excluded from gross income.
Loans eligible for the exclusion under the provision are loans made by (1) the United States (or an instrumentality or agency thereof), (2) a State (or any political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a State, county, or municipal hospital and whose employees have been deemed to be public employees under State law, (4) an educational organization that originally received the funds from which the loan was made from the United States, a State, or a tax-exempt public benefit corporation, or (5) private education loans (for this purpose, private education loan is defined in section 140(7) of the Consumer Protection Act).

Limitation on excess business loss:

Loss limitation rules replace limitation on excess farm loss rules, and instead, a non-corporate taxpayer's excess business loss is disallowed. Disallowed excess business loss treated as NOL carryforward. This limitation applies after the application of the passive loss rules.

Alimony payments:

For any divorce or separation agreement executed after Dec. 31, 2018 (or executed on or before Dec. 31, 2018 but modified later if the modification expressly provides that the Act rules apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

Consolidation of education savings rules:

The bill would provide that elementary and secondary school expenses of up to $10,000 per year would be qualified expenses for qualified tuition programs. This limitation applies on a per-student basis, rather than a per-account basis.  Thus, under the provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of tax, regardless of whether the funds are distributed from multiple accounts.  Any excess distributions received by the individual would be treated as a distribution subject to tax under the general rules of section 529. The provision also modifies the definition of higher education expenses to include certain expenses incurred in connection with a home-school.  Those expenses are (1) curriculum and curricular materials; (2) books or other instructional materials; (3) online educational materials; (4) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student); (5) dual enrollment in an institution of higher education; and (6) educational therapies for students with disabilities.

Deductions and personal credits

Mortgage interest deduction:

Deduction for home mortgage interest is limited to interest on up to $750,000 ($375,000 for married taxpayers filing separately) of acquisition indebtedness and the deduction for interest on home equity indebtedness is suspended. For tax years beginning after Dec. 31, 2025, the pre-Act $1 million/$500,000 acquisition indebtedness limitations are restored and apply regardless of when the indebtedness was incurred, and the suspension for home equity indebtedness interest ends.

The new lower limit doesn't apply to acquisition indebtedness incurred before Dec. 15, 2017. A taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases the residence before Apr. 1, 2018, is considered to incur acquisition indebtedness before Dec. 15, 2017.

The pre-Act acquisition indebtedness limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, provided the resulting indebtedness doesn't exceed the amount of the refinanced indebtedness.

State and local tax (SALT) deduction:

The deduction is limited to $10,000 ($5,000 if MFS) for combined state/local property, state/local/foreign income, and general sales tax paid or accrued in the tax year.
May not deduct foreign real property taxes.

Personal casualty loss deduction:

Personal casualty losses are nondeductible unless attributable to a federally declared disaster.

Gambling loss deduction:

Losses from wagering transactions is now defined as not just losses from wagering transactions but also any expense associated with a trade or business of gambling.

Charitable contributions:

The new law increases the allowable deduction for cash donations made to public charities from 50% of Adjusted Gross Income (AGI) to 60% of AGI.

The new law removes the Pease limitation from the tax code. The Pease limitation was an overall reduction on itemized deductions for higher-income taxpayers. The rule reduced the value of a taxpayer’s itemized deductions by 3% of adjusted gross income (AGI) over a certain threshold. The 3% reduction continued until it phased out 80% of the value of the taxpayer’s itemized deductions.

The ability for those 70½ or older to make “qualified charitable distributions,” also known as IRA rollover gifts, wasn’t changed by tax reform. It will still be possible for these donors to make tax-free gifts of up to a total of $100,000 per year from their IRAs, which will also qualify as part of their mandatory withdrawal for the year.

Medical expense deduction:

For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshold on medical expense deductions is reduced to 7.5% of AGI for all taxpayers. In addition, the 10%-of-AGI threshold that applied under pre-Act law for AMT purposes doesn't apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019.

Moving expense deduction:

For taxable years, beginning after December 31, 2017 and before January 1, 2026 the deduction for moving expenses and the exclusion for qualified moving expense reimbursement is suspended, except for members of the Armed Forces of the United States on active duty who move pursuant to a military order and incident to a permanent change of station.

Miscellaneous itemized deductions subject to 2% floor:

Suspends miscellaneous itemized deductions that are subject to the 2% floor.
Miscellaneous itemized deductions to which the 2%-of-AGI floor applied include:

• Unreimbursed employee business expenses
• Unreimbursed vehicle expenses of rural mail carriers
• Investment expenses and expenses for the production or collection of income
• Tax determination expenses
• Expenses allowed under the “hobby loss” rules

Overall limitation on itemized deductions:

“Pease limitation” on overall itemized deductions (also referred to as the 3%/80% rule) is suspended.

Child tax credit:

Child tax credit is doubled from $1,000 to $2,000 per child. The threshold for phaseout increased to $400,000 for MFJ and $200,000 for all other filers. The refundable portion of credit is increased from max of $1,000 per child or 15% of earned income over $3,000 to $1,400 or 15% of the earned income over $2,500. New $500 nonrefundable credit for dependents who do not qualify for the child tax credit. Dependents must have a SSN to qualify for the child tax credit. ITIN and ATIN will no longer qualify. This requirement does not apply to the $500 credit for other dependents.

Credit for other dependents:

Dependents who can't be claimed for the Child Tax Credit may still qualify for a non-refundable $500 credit. The dependent must be a U.S. citizen, national, or resident alien.

Savings, pensions, and retirement

Recharacterization of certain IRA and Roth IRA contributions:

Repeal of the rule allowing recharacterization of Roth IRA contributions. Under pre-Act law, an individual could elect to recharacterize a contribution made to one type of IRA (traditional or Roth) as made to the other type of IRA in a so-called “conversion contribution” by making a trustee-to-trustee transfer to the other type of IRA. The Act provides that for years beginning after Dec. 31, 2017, the rule allowing recharacterization of IRA contributions does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization can't be used to unwind a Roth conversion.

Rollovers of plan loan offsets:

The period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the taxable year in which the plan loan offset occurs.

Length of service awards for public safety volunteers:

The Act increases the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service to $6,000 and adjusts that amount in $500 increments to reflect changes in cost-of-living for years after the first year the provision is effective. In addition, under the provision, if the plan is a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Actuarial present value is to be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant’s age at the time of the calculation.

Estate and gift taxes

The Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

Alternative Minimum Tax

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the amount of an individuals alternative minimum taxable income (AMTI) that is exempt from AMT–the “AMT exemption” amounts–as follows:

• For joint returns and surviving spouses, $109,400;
• For single taxpayers, $70,300;
• For marrieds filing separately, $54,700.

The above AMT exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the individual's AMTI exceeds a phase-out amount, increased as follows:

• For joint returns and surviving spouses, $1 million.
• For all other taxpayers (other than estates and trusts), $500,000.
• For trusts and estates, the base figure of $22,500 and phase-out amount of $75,000 remain unchanged.

All of these amounts will be adjusted for inflation after 2018 under the new C-CPI-U inflation measure.

Affordable Care Act individual mandate

For months beginning after December 31, 2018, Individual Shared Responsibility Payment is reduced to zero.

Other provisions

ABLE account changes:

For tax years beginning after Dec. 22, 2017 and before Jan. 1, 2026, the ABLE account contribution limitation for contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the federal poverty line for a one-person household; or (b) the individual's compensation for the tax year.

QTP can be rolled over to ABLE account without penalty provided that the ABLE account is owned by the designated beneficiary of the 529 account, or a member of such designated beneficiary's family. The rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

The Act allows the designated beneficiary of an ABLE account to claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account. The Act also requires that a designated beneficiary (or person acting on the beneficiary's behalf) maintain adequate records for ensuring compliance with the above limitations. 

IRS levy:

The Tax Cuts and Jobs Act extends the period so that an amount equal to the money levied upon or the money received from a sale of the property may be returned within two years from the date of the levy.

Similarly, the period for a suit by someone other than the taxpayer for (i.) the return of property wrongfully levied on, (ii) an injunction against the enforcement of a levy or a sale of the seized property, or (iii) for the return of the proceeds from the sale of seized property is extended so that the suit must be started within two years from the date of the original levy or agreement giving rise to the action. This two-year period is extended if a timely request for the return of property wrongfully levied on was made under, for a period of 12 months from the date of filing of the request or for a period of six months from the date IRS rejects the request, whichever comes first.

Personal casualty losses for Mississippi River Delta Flood Disaster Area:

Exception to the 10% early withdrawal tax applies in the case of a qualified 2016 disaster distribution from a qualified retirement plan. Income attributable to a qualified 2016 disaster distribution may be included in income ratably over three years, and the amount of a qualified 2016 disaster distribution may be re-contributed to an eligible retirement plan within three years. In the case of a personal casualty loss which arose on or after January 1, 2016, in a 2016 disaster area and was attributable to the events giving rise to the Presidential disaster declaration, such losses are deductible without regard to whether aggregate net losses exceed 10% AGI. The losses must exceed $500 per casualty. Additionally, such losses may be claimed in addition to the standard deduction.

Title II - Business Tax Reform

Corporate tax rate

Corporate tax rate reduced to 21%.

Depreciation

Increased expensing:

The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.

The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if all the following factors apply:

• The taxpayer didn’t use the property at any time before acquiring it.
• The taxpayer didn’t acquire the property from a related party.
• The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
• The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
• The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.

Also, the cost of the used qualified property eligible for bonus depreciation doesn’t include any carryover basis of the property, for example in a like-kind exchange or involuntary conversion.

The new law adds qualified film, television and live theatrical productions as types of qualified property that are eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after Sept. 27, 2017.

Under the new law, certain types of property are not eligible for bonus depreciation. One such exclusion from qualified property is for property primarily used in the trade or business of the furnishing or sale of:

• Electrical energy, water or sewage disposal services,
• Gas or steam through a local distribution system or
• Transportation of gas or steam by pipeline.

This exclusion applies if the rates for the furnishing or sale have to be approved by a federal, state or local government agency, a public service or public utility commission, or an electric cooperative.

The new law also adds an exclusion for any property used in a trade or business that has floor-plan financing. Floor-plan financing is secured by motor vehicle inventory that a business sells or leases to retail customers.

Depreciation limitation for luxury autos and personal use property:

Allowable depreciation for cars and trucks placed in Service after 12/31/2017:
Year 1: 10,000 + Bonus: 8,000
Year 2: 16,000
Year 3: 9,600
Year 4: 5,760

Bonus (168(k)):

For property placed in Service after 9/27/2017, the bonus rate is 100%.

Changes to depreciation of farm property:

Farm property placed in Service after 12/31/2017 may now use 200DB instead of 150DB. The recovery period for machinery and equipment used in a farming business is shortened from seven to five years.

Applicable recovery period for real property:

The general recovery periods of 39 years for nonresidential real property and 27.5 years for residential real property still apply. However, the law changes the ADS recovery period for residential rental properties to 30 years (previously 40 years). Real property businesses that elect out of the interest deduction limit must use ADS to depreciate any residential rental property, nonresidential real property, and qualified improvement property.

Use of ADS for electing farming businesses:

Farming businesses that elect out of the interest deduction limit must use ADS to depreciate any property with a recovery period of 10 years or more.

Small business reforms

Section 179 expensing:

The maximum amount you can elect to deduct for most section 179 property you placed in service in tax years beginning in 2018 is $1,000,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,500,000. Section 179 qualified real property. For property placed in service in tax years beginning after December 31, 2017, section 179 qualified real property is qualified improvement property (as defined in section 168(e)(6)), and certain specified improvements to nonresidential real property placed in service after the nonresidential real property was first placed in service.

S Corporation conversion to C Corporation:

Modification of treatment of S corporation conversions to C corporations. See IRS Tax Reform Tip 2018-179 for more details.

Reform of business related exclusions, deductions, etc.

Limitation of business interest expense deduction:

Interest (secs. 3203 and 3301 of the House bill, secs. 13301 and 13311 of the Senate amendment, and sec. 163(j) of the Code)

NOL Deduction:

Losses arising in Tax Years beginning after December 31, 2017.  This effective date means that losses that arose in tax years that began before Jan. 1, 2018, won't be subject to the 80%-of-taxable-income limit. Taxpayers will have to distinguish between the two types of losses when computing the NOL deduction.

• NOL deduction is limited to 80% of taxable income without regard to the deduction for NOLs.
• NOL cannot be carried back but can be carried forward indefinitely.
• Two-Year farming loss carryback allowed
• Insurance companies get 2-year carryback and 20-year carryforward.

Carryovers to other years are adjusted to take account of the 80% limitation:

• In 2018, a calendar-year taxpayer has a $90,000 NOL. It has no other NOL carryovers. It carries forward the NOL to 2019, a year in which it has taxable income of $100,000. The taxpayer's 2019 NOL deduction is limited to $80,000 ($100,000 × 80%). The remaining $10,000 can't be deducted in 2019, but can be carried forward indefinitely.

Like-kind exchanges of real property:

Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property that is held for use in a trade or business or for investment.  Real property, also called real estate, includes land and generally anything built on or attached to it.  An exchange of real property held primarily for sale still does not qualify as a like-kind exchange. A transition rule in the new law provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017, or received replacement property on or before that date.

Thus, effective January 1, 2018, exchanges of personal or intangible property such as machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for non-recognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible for non-recognition of gain or loss as like-kind exchanges.

Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Improved real property is generally of like-kind to unimproved real property.  For example, an apartment building would generally be of like-kind to unimproved land.  However, real property in the United States is not of like-kind to real property outside the U.S.

Deductions for domestic production activities:

Repeal of deduction for income attributable to domestic production activities.

Entertainment expenses - Schedule C / 2106:

No deduction is allowed with respect to entertainment, amusement, or recreation; membership dues for a club organized for business. Employers cannot deduct cost of providing qualified transportation fringes and benefits.

Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.

Employee achievement awards:

Repeal of exclusion for employee achievement awards.

Unrelated business taxable income:

Under § 501(a), organizations described in §§ 401(a) and 501(c) generally are exempt from federal income taxation.  However, § 511(a)(1) imposes a tax (computed as provided in § 11) on the UBTI of organizations described in § 511(a)(2), which includes organizations described in §§ 401(a) and 501(c) (other than a trust described in § 511(b) or an instrumentality of the United States described in § 501(c)(1)) as well as state colleges and universities.  Additionally, § 511(b)(1) imposes a tax (computed as provided in § 1(e)) on the UBTI of certain trusts described in § 511(b)(2).

An exempt organization may engage in more than one unrelated trade or business.  Prior to the enactment of § 512(a)(6), § 1.512(a)-1(a) provided that, with respect to an exempt organization that derives gross income from the regular conduct of two or more unrelated trades or businesses, UBTI was the aggregate gross income from all such unrelated trades or businesses less the aggregate deductions allowed with respect to all such unrelated trades or businesses.  However, § 512(a)(6) changes this calculation for exempt organizations with more than one unrelated trade or business.  Congress intended “that a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year.” H.R. Rep. No. 115-466, at 548 (2017).  Specifically, § 512(a)(6) provides that, in the case of any exempt organization with more than one unrelated trade or business:

(A) UBTI, including for purposes of determining any net operating loss (NOL) deduction, shall be computed separately with respect to each trade or business and without regard to § 512(b)(12) (allowing a specific deduction of $1,000),

(B) The UBTI of such organization shall be the sum of the UBTI so computed with respect to each trade or business, less a specific deduction under § 512(b)(12), and

(C) For purposes of § 512(a)(6)(B), UBTI with respect to any such trade or business shall not be less than zero.

Thus, § 512(a)(6) no longer allows aggregation of income and deductions from all unrelated trades or businesses.  Section 512(a)(6) applies to taxable years beginning after December 31, 2017, but, as discussed in more detail in section 9 of this notice, not to NOLs arising before January 1, 2018, that are carried over to taxable years beginning on or after such date.

Technical termination of partnership:

Repeal of technical termination of partnerships.

Research and Development Credit:

Amortization of research and experimental expenditures (sec. 3315 of the House bill, sec. 13206 of the Senate amendment, and sec. 174 of the Code).

Business credit reform

Orphan drug credit:

Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions.

Real estate rehabilitation credit:

Changes to when the credit is claimed, as well as a transition rule. See the IRS Tax Reform Tax Tip 2018-161 for more details.

Employer credit for paid family medical leave:

Provides a tax credit for employers who provide paid leave to their employees. See Section 45S FAQs for more details.

Additional resources:

•  Pub. 5307 - Basics for individuals and families
• Tax reform provisions that affect individuals
• Section 199A final regulations
• Highlights of tax reform for businesses
• Tax reform provisions that affect businesses
• Tax reform provisions that affect exempt organizations