The 2017 tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act, has a significant impact on individual taxpayers as well as businesses.
Here’s an overview of the most important changes affecting individual taxpayers in California.
Bracket Expansion and Tax Rate Reductions
Most individual tax brackets are now expanded at lower rates of around 3%. This includes the top marginal rate, which is now 37% instead of 39.6%. However, state and local taxes are no longer 100% deductible.
California is in the process of attempting to save the deductions through charitable contributions, which are still deductible. Legislation is pending to allow any state taxes to be credited against the state income tax and recharacterized as a charitable contribution. It’s unknown what the federal government reaction to this will be.
There’s also an expansion of exemptions and thresholds that limits exposure to the alternative minimum tax (AMT). The exemption deduction is doubled and doesn’t phaseout until taxable income under this system is in excess of $1 million for joint filers and $500,000 for all others.
With the elimination of most of the state and local tax deduction, the main source of add backs under this system was minimized, meaning fewer taxpayers will be subject to this flat 26% or 28% tax rate.
Increase of the Standard Deduction
The standard deduction is essentially doubled. For joint filers, the deduction is increased to $24,000 from $12,700; and for single and separate filers, it’s now $12,000 instead of $6,350.However, the previous personal exemption deductions—which were allowed at approximately $4,000 per exemption before subject to phase outs—are now eliminated.
Changes to Itemized Deductions
Important modifications to itemized deductions include the following:
• There’s a cap of $10,000 for state income taxes, real estate taxes, and personal property taxes, meaning all amounts paid in excess of that amount are no longer deductible.
• There’s also a new limit on the home mortgage interest deduction for new mortgages. Interest is deductible on only $750,000 of mortgage loan indebtedness.
• The home equity loan interest deduction is eliminated. Previously, it was allowed on up to $100,000 of a home equity loan used for personal purposes.
• Miscellaneous itemized deductions subject to the previous 2% of adjusted gross income (AGI) limitation are eliminated too. This change ends the deduction for unreimbursed employee business expenses, personal tax return preparation fees, and investment expenses, including asset management fees.