The potential changes that were proposed in an early version of the 2017 Tax Cuts and Jobs Act had many U.S. taxpayers concerned and confused about what the implications might be. Taxpayers feared they would lose all sorts of deductions as result of the new tax laws and that, ultimately, the changes would result in money out of their pockets.
As it turns out, however, the final legislation, which passed on December 20, 2017 and was signed into law on January 3, 2018, ended up being much less scary than many Americans had initially feared. And while the biggest impact may prove to be on businesses, there are some important changes that will impact the majority of American taxpayers.
Your income may put you in a different tax bracket
Tax rates have changed a bit under the new tax law. Taxpayers will want to note the changes and what they mean for those filing single and those filing jointly. Take a look at all of the new tax brackets and tax percentages here.
A majority of American taxpayers will benefit from lower tax rates
For example, single taxpayers earning between $38,701 and $82,500 will reduce their tax liability from 25 percent to 22 percent. Meantime, those joint filers earning between $165,001 and $233,350 will get a reduction in tax liability from 28 percent down to 24 percent. For five additional tax brackets, there will be reductions of 3 percent or more. To illustrate the potential savings, consider that a family earning $233,350 would potentially reduce their tax liability by more than $9,000.
The standard deduction goes up and the personal exemption goes away.
The new tax plan increases the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. The personal exemption has been eliminated. The net effect is a modest increase in the overall tax savings for those taxpayers who did not previously itemize deductions. By way of example, prior to the 2017 Act, a married couple without children would have been able to claim a $13,000 standard deduction and two personal exemptions of $4,150 each (total of $8,300), resulting in an aggregate offset of $21,300.
Tax preparation fees are no longer deductible
You can no longer write off your previous year’s tax preparation fee. Previously the fee you paid a professional to do your taxes was an eligible deduction.
You can no longer write off mileage if you are a W-2 employee
Previously, mileage had to exceed 2 percent of your adjusted gross income (AGI) in order to write it off, but now even if that 2 percent is met or exceeded it cannot be written off against income.
Taxes on business owners has changed
If you own a business, you will now have a flat tax of 21 percent, instead of the 35 percent tax rate that was previously in place.
The child tax credit will go up from $1,000 to $2,000
If you have a child living with you who was under the age of 17 at the end of the year you qualify for this deduction. This change also increases the income threshold at which the credit gets phased out to $400,000 for married taxpayers and $200,000 for others. This could mean significant savings for taxpayers with large families.
Medical and dental expense deductions have been expanded
While the percentage has gone up and down over the years, the most recent requirement was that your medical and dental expenses had to exceed 10 percent of your adjusted gross income (AGI) in order to write them off against your income. Now, they must only exceed 7.5 percent of your AGI for you to be able to deduct them.
Alimony is no longer deductible or taxable
Under the new tax law, alimony will no longer be deductible against income for the person paying it, nor will it count as taxable income for the person receiving it. This change is effective for divorce decrees signed after January 1, 2019.
Entertainment expenses can no longer be deducted, but meals can
The deduction for business-related entertainment has been repealed as part of the new tax plan. Businesses can still generally deduct 50 percent of the cost of qualified meals.
There are lower limits on mortgage interest deductions
Securing a good home mortgage interest rate may matter more now, thanks to this change. That’s because home mortgage interest for debt incurred after December 15, 2017 to acquire or improve a home, is now limited to the interest on $750,000 worth of principal. This is a decrease from the prior $1,000,000 principal limitation and applies to both primary and secondary residences. Home loan debt acquired prior to December 15, 2017, is grandfathered and this change does not apply.
There is a limit on interest deductions for home-equity lines of credit (HELOCs)
Like primary mortgage loan interest, the interest on HELOC loans has also been impacted by the new tax law. Interest on these loans will no longer be deductible, regardless of when the loan was acquired, unless the funds are used explicitly for home improvements or acquisitions.
There are now limitations on property, state and local tax deductions (“SALT”)
Taxpayers’ state and local tax deductions will now be capped at $10,000 under the new tax legislation. Meaning, if you itemize deductions on your taxes, you will be able to deduct your state individual income, sales and property taxes up to a limit of $10,000, but you’ll have to choose between property tax and income or sales tax. All three cannot exceed that $10,000 amount.
The Alternative Minimum Tax (AMT) remains intact
The original bill intended to eliminate the AMT altogether. Under the final legislation, however, the tax remains although the exemption has been increased to $500,000 for single taxpayers and $1 million for couples. This change is expected to result in fewer taxpayers being subjected to the AMT.
The estate tax exemption is doubled
The new tax law doubles the estate tax exemption to $11.2 million for single filers and $22.4 million for joint filers. This change will only affect the roughly 1 percent of the American population that pays estate taxes.
The Obamacare tax is no more
The new tax legislation eliminates the individual health care mandate penalty tax that was imposed by the Affordable Care Act (aka, “Obamacare”) beginning in 2019. However, The penalty tax will remain in effect for the 2018 calendar year.
“Like-kind” exchanges are limited
Like Kind Exchanges under Section 1031 of the Internal Revenue Code are now limited to exchanges of real property. They no longer apply to any other property, including personal property associated with real property.
Education tax credits, student loan interest deductions remain
Many of the 44 million Americans with student loan debt feared that these changes could be devastating. However, each of the credits (American Opportunities, Lifelong Learner) live on in the new tax law, as does the ability to deduct student loan interest.
The use of Section 529 accounts has been expanded
This may be one of the most significant impacts of the tax reform on education. Section 529 accounts, which are tax-advantaged savings and prepaid tuition plans designed to encourage people to save for future college costs, have been expanded. Starting in 2018, these accounts can be used for tuition at public, private or religious schools in addition to college tuition. Section 529 will be limited to $10,000 per student during any taxable year.
Coverdell Savings Accounts have been eliminated
The use of Coverdell Education Savings Accounts, which essentially enabled college tuition money to be put aside tax-free at a rate of up to $2,000 per year, is being phased out as part of the new tax plan.
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