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TAX BULLETIN 2018-1: TAX REFORM SIGNED INTO LAW

INDIVIDUAL TAXES (continued)

2017 Law
2018 Law

Itemized Deductions
Under the “Pease” limitation, up to 80% of most itemized deductions are lost when adjusted gross income exceeds $313,800 ($261,500 for single taxpayers)
Repeals the Pease limitation on itemized deductions
Mortgage interest deduction: $750,000 limit on acquisition indebtedness retained (principal or secondary residence); deduction for home equity loan repealed
Deduction for state and local income, sales tax and real property taxes limited to $10,000 in aggregate ($5,000 for married filing separately); deduction allowed for state and local taxes on trade or business or if related to production of income. Payment of income taxes in 2017 for a subsequent year would not be deductible in 2017.⁴
Deduction for medical expenses retained and liberalized for 2017 and 2018 ⁴

Retirement Savings
Contributions can be placed into deferred account, up to contribution cap
Unchanged

AMT
Parallel tax calculation with top rate of 28% and $84,500 exemption for married taxpayers ($54,300 others); phase out of exemption begins at $160,900 for married taxpayers ($120,700 others)
Retains and modifies AMT; exemptions raised to $109,400 (married) and $70,300 (others); phase-out of exemption begins at $1 million for married taxpayers ($500,000 others). ⁴

Carried Interest
Retains character as capital gain and eligible for preferential tax rates
Requires three-year holding period to attain long-term capital gains rate

Investment Surtax
3.8% tax on “net investment income”
Unchanged – continues to apply

OBSERVATIONS – INDIVIDUAL TAXES

Under the Act, there will be winners and losers on the personal income tax side. Generally, wage earners from no-tax states⁵ could see tax savings under the Act. For instance, a Florida taxpayer earning $1 million with moderate itemized deductions may see a tax savings of about $30,000 under the Act. A similar taxpayer in New York State may see a savings of about $3,500 according to our preliminary analysis..⁶

Conversely, very high-wage earners from high-tax states could see a higher tax bill. A taxpayer earning $3 million in New York City may see a significant tax increase: $44,000 under the Act, due in part to the loss of significant deductions. A similar taxpayer in Florida would see a tax savings of about $91,000 under the Act (primarily due to the lower top rate, elongated 35% tax bracket and regaining itemized deductions that are no longer phased-out), according to our preliminary analysis.

Married couples could fare worse than two single taxpayers with a similar amount of income. The so-called marriage penalty hits particularly hard under the new tax brackets. The penalty is also exacerbated by permitting married couples only a $10,000 state income/real estate tax deduction, but allowing each of two single filers a deduction in the same amount ($20,000 combined). Under the changes, a single taxpayer with $500,000 of wages

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