Previously, I talked about how the TCJA impacted payments for medical care, fighting audits and mortgage interest payments. In this fourth and final installment, I’ll cover how a few other areas will be changing under the legislation.
Here are a few highlights I think are crucial to discuss with clients:
Tax brackets: The TCJA replaced the brackets for 2017 with seven new rates that are “indexed,” meaning they’re adjusted annually to reflect any intervening inflation.
The new ones begin at 10 percent on taxable income (what’s left after reportable income is offset by deductions).They climb in stages to 12, 22, 24, 32, and 35 percent and then top off at 37 percent.
Who is subject to the highest bracket? Here’s the answer: Married persons filing joint returns and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies) when their taxable income surpasses $600,000 for 2018 ($612,350 for 2019); heads of household and single persons when their taxable income surpasses $500,000 for 2018 ($510,300 for 2019); and married persons filing separate returns when their taxable income surpasses $300,000 for 2018 and $306,175 for 2019.
Surtaxes on income from earnings and investments: While the top official rate for ordinary income from sources like earnings and pensions is 37 percent and the top rate for long-term capital gains is 20, higher-income individuals also could be dinged for Medicare surtaxes of 0.9 percent on earned income and 3.8 percent on investment income.
The surtaxes were introduced in 2013 by Obamacare, and the TCJA didn’t change them.
Surtax on earned income: The tax of 0.9 percent applies only to individuals with wages above the applicable thresholds—$250,000 for joint filers and qualifying widows/widowers, $125,000 for married couples filing separate returns and $200,000 for single filers. Their employers pay nothing extra. The levy also applies to individuals with self-employment income above the thresholds.
Surtax on investment income: The tax of 3.8 percent applies to certain kinds of investment income. It kicks in only when modified adjusted gross income (MAGI) exceeds specified amounts. It’s the same as AGI for almost all individuals except for expatriates, who must add back certain amounts that are excludable from U.S. income taxes.
The 3.8 percent tax applies only to individuals with MAGI above thresholds that are the same as those for the tax of 0.9 percent. Even then, it’s imposed on the smaller of a person’s net investment income or the amount by which MAGI exceeds the applicable threshold.
Additional articles: A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 275 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.