The Foreign Service Journal, April 2018

78 APRIL 2018 | THE FOREIGN SERVICE JOURNAL AFSA NEWS Tax Tune-Up What’s New in the Tax Cuts and Jobs Act of 2017 BY SAM SCHMITT On Dec. 22, 2017, President Donald Trump signed the final version of House Resolution 1 (known as H.R, 1), which amends various sections of the Internal Revenue Code of 1986. Also known as the Tax Cut and Jobs Act of 2017, the 185-page law makes several changes to the tax provisions summarized in the AFSA 2017 Tax Guide, published in the January-February Foreign Service Journal, two of which will immediately affect AFSA members whose taxes are due this month. The remaining amendments, which generally take effect in 2018 (for filing in April 2019), center on a reduction in the corporate income tax rate and repatriating foreign profits currently sheltered from tax overseas. The new tax law makes wide-ranging changes that will affect both individuals and businesses, with many changes to the individual tax laws sun-setting in 2026. For the individual taxpayer, the new law cuts the marginal tax rates, consolidates the personal exemption with the standard deduction, eliminates some deductions while increasing others and effectively eliminates the individual mandate of the Affordable Care Act. The net effect of the changes can reasonably be expected to emphasize private-sector invest- ment and require increased public-sector efficiency. This article summarizes those portions of the tax law that are most significant generally, as well as those that are most important to the Foreign Service community. A par- ticular emphasis will be placed on changes to the provisions reviewed in the AFSA 2017 Tax Guide. The article simplifies the most significant portions of the new law. There is no substitute for reading the statutes themselves and retaining the services of a tax professional before applying the new rules in an income tax return. It is also important to note that changes to the law and its interpretation (possibly even corrective legislation) should be expected as its effects and meaning become clear over the year. Changes That Take Effect Immediately Amendments to some of the laws we summarized in the AFSA 2017 Tax Guide have already taken effect. Filers need to be aware that these changes must be accounted for in their 2017 tax returns due in April 2018. • 7.5 percent floor for medical and dental expenses, applicable to 2017 taxes (filed in April 2018) The amended tax law allows taxpayers who itemize to deduct medical expenses to the extent they exceed 7.5 percent of the adjusted gross income (AGI). Without the amendments, this floor would have increased to 10 percent for 2017 taxes (filed in April 2018). The 7.5 percent floor will remain in effect for 2018 (filed in April 2019). • Estate tax planning, gifts and retirement contributions The new law also increases the lifetime gift and estate exclusion to the first $10 million ($11.2 million adjusted for inflation) gifted or bequeathed in 2018. It is important to understand that gift and estate taxes are connected. The use of this exemption on one’s taxable lifetime gifts reduces the total exemption allowed for bequests at death. Any unused portion of one’s lifetime exemption may be trans- ferred to a surviving spouse with a portability election on the decedent’s final tax return. If gifts of less than $15,000 per person per year ($30,000 for joint gifts split between spouses) or gifts otherwise exempt from the gift tax regime (such as gifts between spouses) are the only gifts made dur- ing a taxpayer’s life, the surviving spouse may then exclude up to $22.4 million from the federal gift and estate tax. Changes to Tax Laws Applicable to the 2018 Tax Year (filed in April 2019) The amendments to some of the laws we summarized in the AFSA 2017 Tax Guide will not affect members’ tax returns until they file 2018 taxes in April 2019. Individual Taxes H.R. 1 made significant changes to individual income tax provi- sions, most of which sunset at the end of 2025 as a condition of budget reconciliation rules that were required to pass the law with fewer than 60 votes in the Senate. The reduction in each marginal tax rate and increase in the dollar limits for each cor- responding income bracket were chief among those changes. The number of tax brackets remains the same despite signifi- cant political debate about consolidating some (see chart). The long-term capital gains rates of 0 percent, 15 percent and 20 percent, and their associated income brackets, were not changed other than to adjust for inflation. New Tax Brackets for 2018 • Increased standard deduction and eliminated personal exemption H.R. 1 effectively combined the personal exemption ($4,050 in 2017) with an increased standard deduction for