First of all, Happy New Year! In addition to the calendar turning over and people begrudgingly returning to school/work/etc after the holiday season, this time of year is marked annually by resolutions and renewal. Many people attempt to modify particular aspects of their lives to better themselves - and perhaps the people around them - with varying degrees of duration and success.
As I am sure you have seen by now, Congress and President Trump have completed their overhaul of the tax rules, as the President signed the 2017 Tax Cuts and Jobs Act into law on December 22nd. While some resolutions fizzle out within days/weeks, this sweeping reform - which went into effect January 1, 2018 - is signed, sealed, and delivered and looks to be here to stay for years to come. What the degree of success will be with respect to the average taxpayer as well as the economy as a whole remains to be seen. But one thing is for sure: this change is here for the long haul. So, it definitely pays to know the implications it may have on yourself and your household.
The obvious question that most people are asking right now is, “How is this new tax law going to affect me and my family?” Well, unfortunately the answer isn’t as obvious without a deeper dive into the new rules. Some deductions are decreasing or being eliminated; some tax credits are increasing. There is a lot to unravel. And even then, whether or not you will benefit from the changes will depend on your household’s specific situation- for example, certain taxpayers with children might be aided by the increased child tax credit while others with the same number of children but a different income might be in worse shape as a result.
So, what I would like to do in this article is summarize most of the key changes of this tax legislation. As I mentioned earlier, it may not be clear whether or not these changes will serve to reduce or increase your tax liability, or what strategies you could implement to maximize your tax savings under the new plan. Therefore, I will be offering a service by which I will analyze your specific tax situation and help you determine how the new law affects you and what steps you might be able to take moving forward to adapt to and potentially benefit from the recently implemented rules.
Without further ado, here are ten notable changes under the 2017 Tax Cuts and Jobs Act (the first nine of these revert to the previous law in 2026):
1) New Tax Rates and Brackets
Under the new law, the tax rates and brackets will change across the board for single, joint, and head of household filers through 2025. Here is the 2017 table:
0% tax bracket
$0 - $9,325
$0 - $18,650
$0 - $13,350
Beginning of 15% bracket
Beginning of 25% bracket
Beginning of 28% bracket
Beginning of 33% bracket
Beginning of 35% bracket
Beginning of 39.6% bracket
And here is how it will look under the new law in 2018 (this will be adjusted yearly for inflation, although under a different method than it currently is calculated):
10% tax bracket
$0 - $9,525
$0 - $19,050
$0 - $13,600
Beginning of 12% bracket
Beginning of 22% bracket
Beginning of 24% bracket
Beginning of 32% bracket
Beginning of 35% bracket
Beginning of 37% bracket
So, as you can see, on the whole, the tax rates have been reduced after the lowest 10% tax bracket. Some single and head of household filers might be negatively impacted by the new brackets however, as the 35% rate kicks in at a much lower level of income. But, in general, this particular aspect of the new law should work in most taxpayers’ favor.
2) Increase in Standard Deductions
Another significant change is that the standard deduction- taxpayers can choose to take either the standard deduction or itemize their deductions- almost doubles for each filing status. Single filers will see an increase in 2018 to $12,000 (from $6350) and for joint filers it increases to $24,000 (from $12,700).
More people will likely end up taking the increased standard deduction as the advantage of electing to itemize deductions vanishes for many taxpayers. As with most other changes, the standard deduction returns to current levels in 2026.
3) Elimination of Personal and Dependent Exemptions
One casualty of the new tax law is the removal of personal and dependent exemptions. In 2017, each exemption was worth $4,150, but now there will be no such deduction. Despite the higher standard deduction, it is possible some taxpayers with many children/dependents will pay a higher amount in taxes as a result of this change. This also reverts to current law after 2025.
4) Increase in Child Tax Credit and New Non-Child Dependent Credit
A benefit to those with dependent children is that the child tax credit increases from $1,000 to $2,000 starting this year, with up to $1,400 of it being refundable (meaning you could still receive it if your tax liability is zero). While the child tax credit has only been, and continues to be, for children under the age of 17, there is a new non-child dependent credit as well of $500 (this is non-refundable). This will help those with dependent children above that 17 year old limitation and those that provide support for elderly parents.
One other significant change to the Child Tax Credit rules is the income limitations to qualify for the credit. Previously, the credit started phasing out once a single filer’s income hit $75,000 ($110,000 for married filing jointly), but now those phase-outs don’t start until a single filer hits $200,000 in income ($400,000 for joint returns). This will allow many people that previously didn’t qualify for this tax credit to benefit from it.
5) Cap on State and Local Tax Deduction
Under previous law, real estate tax, personal property tax, and either state/local income or sales tax were fully deductible for those that itemized their deductions. Now, however, there is a cap on the total that can be deducted- $10,000. While a good number of taxpayers won’t be impacted by this cap- especially those living in states with little to no income taxes- many people will see a reduction in their overall itemized deductions as a result.
This particular change also sparked a rush at the end of 2017 of people trying to pre-pay their 2018 real estate and property taxes in order to maximize the tax benefit before the new laws went into effect. For many, this strategy was seemingly halted by the IRS, who released an advisory statement saying in effect that you can’t deduct a 2018 property tax in 2017 unless the tax has already been assessed in 2017. There could end up being further clarification on this, but for now that is the way things appear to stand.
6) Limits on Mortgage Interest Deduction
Prior to the new law, interest on home acquisition debt of up to $1,000,000 was deductible. Under the TCJA, this limit decreases to $750,000 of such debt. This doesn’t apply to anyone that had their mortgage prior to December 15, 2017 as those loans are grandfathered in under the old limitation. Additionally, interest on home equity debt is no longer deductible.
7) Elimination of Several Current Itemized Deductions
Another reason why more people may end up taking the standard deduction than in years’ past is because certain itemized deductions are being eliminated altogether. These include the casualty and theft loss deduction - except for losses in federal disaster areas - and others such as the deduction for unreimbursed employee expenses, union dues, and other miscellaneous deductions. While these deductions were not as common as state and local taxes, mortgage interest, and charitable contributions, some taxpayers will be affected by one or more of these dismissals.
8) Changes to Alternative Minimum Tax
The next change I would like to highlight will be welcomed by many that are currently subject to the pesky Alternative Minimum Tax (which is a parallel tax calculation to the regular income tax- if the AMT is higher than the regular tax amount, the taxpayer is responsible for the difference).
A couple of key modifications have been made that should serve to reduce the number of people obligated to pay this tax. First, under current law, the 2018 AMT exemption would have been $55,400 for single filers and $86,200 for joint filers. However, these exemptions are increased to $70,300 and $109,400 respectively under the TCJA. Second, the amount of this exemption won’t start phasing out until a single taxpayer reaches $500,000 of income ($123,100 under current law) and $1,000,000 for joint taxpayers $164,100 under current law). So, this should help bring the AMT below the individual tax amount for a good number of people, and thus leaving them solely with the regular income tax liability.
9) Income Deduction for Pass-Through Businesses
This new rule is a bit complex, and so I will just briefly highlight it here as it will potentially affect a lot of small business owners and self-employed individuals. Income from pass-through businesses- such as sole proprietorships, LLCs, and S Corporations- will be eligible for up to a 20% deduction, which will be limited above $157,500 in income for single taxpayers and $315,000 for joint filers. There are also other limitations to this deduction, but I will not be diving deeper into this aspect of the new law at this time.
10) Repeal of Individual Health Insurance Mandate
The last change that I would like to mention here is that the individual health insurance mandate has been permanently repealed. This means that there is no longer a penalty for failing to have health insurance (if a taxpayer doesn’t qualify for one of the coverage exemptions).
While this doesn’t cover every single aspect of the new tax law, I hope it provides you with some insight into the changes that were implemented under this fresh piece of legislation. The ink is barely dry on the Tax Cuts and Jobs Act, but the new regulations are in effect as of January 1. So, it’s best to not only be aware of the changes and how they may impact you, but also to adjust accordingly and make any prudent alterations to your strategy as a result of our new tax landscape.
If you have any questions, please feel free to contact my office at 410-451-4029. Thank you and again- Happy New Year!