Tax rate brackets and preferential rates for capital gains/qualified dividends

The 10%, 15%, 25%, 28%, 33%, 35% and 39.6% brackets for 2017 ordinary income reflect an inflation adjustment. The top bracket of 39.6% applies if taxable income exceeds $418,400 for single taxpayers, $444,550 for heads of households, $470,700 for married persons filing jointly and qualifying widows/widowers, and $235,350 for married taxpayers filing separate returns (1.2).

Qualified dividends (4.2) and long-term capital gains (5.3) may escape tax entirely under the 0% rate, or be subject to capital gain rates of 15% or 20% depending on filing status, taxable income, and how much of the taxable income consists of qualified dividends and eligible long-term gains. The 20% capital gain rate has the same taxable income thresholds as the 39.6% ordinary income rate shown above, that is, either $418,400, $444,550, $470,700, or $235,350, depending on filing status. The 0%, 15%, and 20% rates do not apply to long-term gains subject to the 28% rate (collectibles and taxed portion of small business stock) or the 25% rate for unrecaptured real estate depreciation (5.3).

Individual health care mandate and premium tax credit

You are required to have minimum essential health coverage through an employer plan, a government program, or other plan, or pay a penalty (38.5), unless you are exempt from this requirement (38.6). The penalty amount for 2017 is the higher of (1) 2.5% of household income above your filing threshold, or (2) $695 per person in your household ($347.50 per dependent child under age 18), up to a maximum of $2,085.

To help those of modest means pay premiums for coverage obtained from a government exchange (Marketplace), there’s a premium tax credit (25.12). Eligibility for this advanceable, refundable tax credit depends on your household income and other factors.

If you claimed the credit in advance when you obtained coverage, you have to reconcile what you already applied toward your premiums with what you are actually entitled to; the difference is reported on your tax return (25.12). If you did not receive the credit in advance but are eligible for a credit, you can claim it on your return.

If you do not claim the premium tax credit and qualify for Trade Adjustment Assistance (TAA), you may qualify for the health coverage tax credit of 72.5% of premiums (25.13).

Phaseout of personal exemptions and itemized deductions

Personal exemptions and itemized deductions are subject to a phaseout. Each $4,050 personal exemption for 2017 is subject to a phaseout if adjusted gross income (AGI) exceeds $313,800 if married filing jointly or qualifying widow/widower, $287,650 if head of household, $261,500 if single, and $156,900 if married filing separately. Phaseout details are at 21.12.

The above AGI phaseout thresholds for exemptions also apply to the phaseout of itemized deductions claimed on Schedule A (Form 1040), but there is no phaseout of deductions for medical expenses, investment interest, casualty/theft losses, and gambling losses. Other itemized deductions are reduced by 3% of AGI exceeding the applicable threshold, but the total reduction cannot exceed 80% of the deductions (13.7).

Standard deductions

The standard deduction for 2017 (13.1) is $12,700 for married persons filing jointly and qualifying widows/widowers, $9,350 for heads of households, or $6,350 for single taxpayers or married persons filing separately. The additional standard deduction (13.4) for being 65 or older or blind is $1,550 if single or head of household ($3,100 if 65 and blind). If married filing jointly, the additional standard deduction is $1,250 if one spouse is 65 or older or blind, $2,500 if both spouses are at least 65 (or one is 65 and blind, or both are blind and under age 65).

Self-employment tax and deduction for portion of self-employment tax; Social Security wage base

For 2017, the tax rate on the employee portion of Social Security is 6.2% on wages up to $127,200, so Social Security tax withholdings should not exceed $7,886.40. Medicare tax of 1.45% is withheld from all wages regardless of amount.

On Schedule SE for 2017, self-employment tax of 15.3% applies to earnings of up to $127,200 after the earnings are reduced by 7.65%. The 15.3% rate equals 12.4% for Social Security (6.2% employee share and 6.2% employer share) plus 2.9% for Medicare. If net earnings exceed $127,200, the 2.9% Medicare rate applies to the entire amount (45.3–45.4). One half of the self-employment tax may be claimed as an above-the-line deduction on Form 1040 (45.3–45.4).

IRA and Roth IRA contribution phaseout; rollover limits

For 2017, the contribution limit for traditional IRAs (8.2) and Roth IRAs (8.20) is unchanged at $5,500, or $6,500 for those age 50 or older.

The deduction limit for 2017 contributions to a traditional IRA is phased out (8.4) for active plan participants with modified AGI (MAGI) between $62,000 and $72,000 for a single person or head of household, or between $99,000 and $119,000 for married persons filing jointly and qualifying widows/widowers. The phaseout range is MAGI between $186,000 and $196,000 for a spouse who is not an active plan participant and who files jointly with a spouse who is an active plan participant.

The 2017 Roth IRA contribution limit is phased out (8.20) for a single person or head of household with MAGI between $118,000 and $133,000, and for married persons filing jointly and qualifying widows/widowers with MAGI between $186,000 and $196,000.

You can make only one IRA rollover (60-day rollover) every 12 months (8.10). There is no restriction on the number of direct transfers you can make each year. If you miss the 60-day deadline because of an event specified in Revenue Procedure 2016-47, you can complete the rollover by self-certifying your eligibility for this relief (8.10).

First-year expensing

For qualifying property placed in service in 2017, first-year expensing (42.3) is allowed up to a limit of $510,000, and the limit begins to phase out if the total cost of qualifying property exceeds $2,030,000 (42.3).

IRS mileage allowance

The IRS standard business mileage rate for 2017 is 53.5 cents a mile (43.1).

The rate for medical expense (17.9) and moving expense (12.3) deductions is 17 cents a mile .

For charitable volunteers (14.4), the mileage rate is unchanged at 14 cents a mile.

Vehicle depreciation limit

For a car placed in service in 2017, the first-year depreciation limit is $3,160 (43.5). For a light truck or van, the first-year depreciation limit is $3,560 (43.5). These first-year limits are increased by $8,000 for vehicles purchased new and used over 50% for business in 2017.

Health savings accounts (HSAs)

The definition of a high-deductible health plan, which is a prerequisite to funding an HSA, means a policy with a minimum deductible for 2017 of $1,300 for self-only coverage and a maximum out-of-pocket cap on co-payments and other amounts of $6,550. These limits are doubled for family coverage ($2,600/$13,100) (41.10).

The contribution limit for 2017 is $3,400 for self-only coverage and $6,750 for family coverage (41.11).

Adoption expenses

For 2017, the limit on the adoption credit as well as the exclusion for employer-paid adoption assistance is $13,570. The benefit phaseout range is modified adjusted gross income between $203,540 to $243,540 (25.8).

Earned income tax credit

For 2017, the maximum credit amount is $3,400 for one qualifying child, $5,616 for two qualifying children, $6,318 for three or more qualifying children, and $510 for taxpayers who have no qualifying child (25.6). The phaseout ranges for the credit have been adjusted for inflation (25.7).

Alternative minimum tax (AMT) exemption and tax brackets

The AMT exemptions, exemption phaseout thresholds, and the dividing line between the 26% and 28% AMT brackets are adjusted for inflation. The 2017 AMT exemptions (prior to any phaseout) are $84,500 for married couples filing jointly and qualifying widows/widowers, $54,300 for single persons and heads of households, and $42,250 for married persons filing separately. See 23.1 for exemption phaseout rules and AMT calculation details.

All nonrefundable personal credits for may be claimed against the AMT as well as the regular tax (23.3).

Eligibility for saver’s credit

The adjusted gross income brackets for the 10%, 20%, and 50% credits are increased for 2017. No credit is allowed when AGI exceeds $31,000 for single taxpayers, $46,500 for heads of households, and $62,000 for married persons filing jointly (25.11).

Deduction limits for long-term care premiums

The maximum amount of age-based long-term care premiums that can be included as deductible medical expenses for 2017 (subject to the AGI floor; see 17.1) is $410 if you are age 40 or younger at the end of 2017; $770 for those age 41 through 50; $1,530 for those age 51 through 60; $4,090 for those age 61 through 70; and $5,110 for those over age 70 (17.15).

Foreign earned income and housing exclusions

The maximum foreign earned income exclusion for 2017 is $102,100 (36.1). The limit on housing expenses that may be taken into account in figuring the housing exclusion is generally $30,630, but the limit is increased by the IRS for high cost localities (36.4).

Annual gift tax exclusion; Gift tax and estate tax exemption

The annual gift tax exclusion stays at $14,000 per donee for 2017 gifts of cash or present interests (39.2). The basic exemption amount for 2017 gift tax and estate tax purposes is $5,490,000 (39.4, 39.9). The top tax rate remains at 40% (39.9).

myRAs

The Treasury announced it was ending the myRA program, although few details were given (8.26). Savings can continue through Roth IRAs.

Relief for victims of Hurricanes Harvey and Irma

The IRS has provided a number of tax breaks for those impacted by these disasters, including filing extensions and allowing hardship distributions and/or loans from qualified retirement plans under simplified procedures. Employees anywhere who participate in leave-based donation programs at work can donate their unused leave time for relief programs and avoid taxation on the donated leave (the employer donates the funds to a charity offering relief for victims of these hurricanes and claims a deduction for the contribution).

For further details regarding these storms or other disaster situations, go to: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

Premium tax credit

The IRS has begun to challenge claims for the premium tax credit and the Tax Court has begun to review them (25.12). The court has made it clear that only coverage purchased through a Marketplace entitles the taxpayer to a credit (assuming other eligibility requirements are met), even if the coverage directly from an insurance company is identical. It also said that the credit does not apply if income is too high, even if the Marketplace provided erroneous information.

Tax breaks that expired at the end of 2016 but could be extended retroactively for 2017

Numerous tax breaks that expired at the end of 2016 will not apply for 2017 unless Congress enacts legislation authorizing an extension. This includes:

• The above-the-line deduction for tuition and fees (33.12).
• The itemized deduction for mortgage insurance premiums (15.6).
• The exclusion for canceled principal residence indebtedness (11.8).
• The tax credit for home insulation, storm windows, and other energy improvements (25.15).

See the e-Supplement at jklasser.com for a legislation update.