The final 2017 Tax Cuts and Jobs Act legislation passed December 20, 2017, and was signed into law on January 3, 2018. It ended up being less scary than many Americans had feared. And while the biggest impact may yet prove to be on businesses, some important changes affect you and the majority of other American taxpayers. Here’s a rundown of the top changes and how they affect you this tax season.
1. Your income may put you in a different tax bracket now
Tax rates have changed a bit under the new tax law. You 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.
2. A majority of American taxpayers will pay lower tax rates
Taxes will be lower for many. For example, single taxpayers who earn between $38,701 and $82,500 will reduce their tax liability from 25% to 22%. Joint filers who earn between $165,001 and $233,350 will reduce their tax liability from 28% to 24%. For five additional tax brackets, there will be reductions of 3% or more. To illustrate the potential savings, a family earning $233,350 can potentially reduce their tax liability by more than $9,000.
3. 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. And the personal exemption and the deduction exemptions are gone.
4. Tax preparation fees are no longer deductible
Tax preparation fees used to fall into the category of miscellaneous fees on Schedule A of form 1040. But, you can’t write off your prior year’s tax preparation fee anymore.
5. You can’t write off mileage if you’re a W-2 employee any more
Previously, you could write off work-related mileage that exceeded 2% of your adjusted gross income (AGI). But now, even if you meet or exceed that 2%, you can’t deduct it from your income. Once considered a miscellaneous itemized deduction, work-related mileage could be written off if could be written off if you’re employer hadn’t already reimbursed you. As of January 1, 2019, you should discuss reimbursement of these expenses. The standard mileage rate of 54.5 cents per mile from 2018 can still be used to calculate the amount for reimbursement.
6. Taxes on business ownership have gone down.
If you own a business, you now have a flat tax of 21%, instead of the 35% tax rate previously in place.
7. The child tax credit doubled—from $1,000 to $2,000
If you have a child under the age of 17 or other dependents who lived with you at the end of the year, you qualify for the child tax credit of $2,000 per dependent. The change income threshold where the credit is phased out has also increased to $400,000 for married taxpayers and $200,000 for others. These changes could significant savings for taxpayers with large families, multiple dependents and larger incomes.
8. Medical and dental expense deductions are more accessible—sort of
While the deductible percentage for medical and dental expenses has gone up and down over the years, the most recent requirement was that they had to exceed 10%of your AGI to write them off. Now, they only have to exceed 7.5% of your AGI for you to be able to deduct them. Celebrate cautiously though. The larger standard deduction may make itemizing harder to justify, so this one may not be all it seems.
9. Alimony is off the table for deduction and taxation
Under the new tax law, alimony is longer be deductible income for the person paying it. And it longer counts as taxable income for the person receiving it. This change effects divorce decrees signed after January 1, 2019.
10. The limits on mortgage interest deductions are lower
Securing a good home mortgage interest rate may matter more now, thanks to this change. That’s because deductible home mortgage interest on a loan to buy or improve a home is now limited to $750,000 of the loan’s principal. This affects loans taken out after December 15, 2017. 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 to the $1,000,000 limit.
11. Interest deductions for home-equity lines of credit (HELOCs) are limited
Like primary mortgage loan interest, the interest on HELOC loans is impacted by the new tax law. Interest on these loans is no longer deductible unless the funds are used explicitly for home improvements or acquisitions. This change applies regardless of when the loan was taken out.
12. Property, state and local tax deductions (SALT) are now limited
Taxpayers’ state and local tax deductions are now capped at $10,000. This means that if you itemize deductions on your taxes, you can deduct your state individual income, sales and property taxes up to a limit of $10,000. Everyone can deduct property taxes. But, each individual has to pick whether to deduct income tax or sales tax in addition to property tax. And the total amount deducted can’t exceed that $10,000 limit.
13. The Alternative Minimum Tax (AMT) remains
AMT applies to higher earners and takes deductions away from those earners. It essentially says that those earners have to pay a certain amount that they can’t deduct their way out of. The original tax bill intended to eliminate the AMT altogether. Under the final legislation, the AMT remains. It uses different tax brackets of 26% and 28% for high earners. High-earning filers have to calculate their taxes the normal way and using the AMT and pay the higher of the two amounts. New income thresholds are $500,000 for single taxpayers and $1 million for joint filers. Those thresholds are the amount of adjusted income after AMT calculations are applied. The change is expected to result in fewer taxpayers being subjected to the AMT.
14. The estate tax exemption is doubled
An estate tax is one charged on the value of the estate of someone who passes away. The new tax law doubles the estate tax exemption, raising it to $11.2 million for single filers and $22.4 million for joint filers. This change only affects the roughly 1% of Americans who pay estate taxes each year.
15. The Obamacare tax is gone
The new tax legislation eliminates the individual health care mandate penalty tax that was imposed by the Affordable Care Act—aka, “Obamacare”.
16. “Like-kind” exchanges are limited
A like-kind exchange defers profits gained on the sale of the property because the property is exchanged for a comparable property and not actually sold for a gain. Previously, real property as well as intangible property like machines, equipment, vehicles, patents, intellectual property and others qualified. The new tax law limits like-kind exchanges under Section 1031 of the Internal Revenue Code to exchanges of real property.
17. Education tax credits and student loan interest deductions remain
Education credits, such as American Opportunities and Lifelong Learner, are intact with the new tax law. The ability to deduct student loan interest also remains. And, you don’t have to itemize to take advantage of education credits or student loan interest.
18. The use of Section 529 accounts is broader
This may be one of the most significant impacts of the tax reform on education. Section 529 accounts are tax-advantaged savings and prepaid tuition plans designed to encourage people to save for future college costs. And with the new tax law, these plans have been broadened to cover more options. Starting in 2018, these accounts apply to tuition at public, private or religious schools in addition to college tuition. Section 529s are limited to $10,000 per student during any taxable year though.
Effects of the New Tax Laws on Individuals
Generally, individual taxpayers may pay slightly less tax when they file April 15, 2019. This is because the tax rate is a bit lower, due to the change in tax brackets and the new standard deduction. Higher income earners and families with children though will likely pay more, because there are fewer itemizable deductions and the loss of personal and dependent exemptions.
For example, prior to the 2017 Act, a married couple with two children would have been able to claim a $13,000 standard deduction, two personal exemptions of $4,150 each—a total of $8,300—and two dependent exemptions of $4,150 for another $8,300. The end result was an aggregate offset of $29,600. Now $16,600 of that is off the table. And the couple’s standard deduction is just $24,000 if filing jointly. A net loss of $5,600.
Maximize Your Refund
With these changes, maximizing your refund may be more important than effort. See ways you can maximize your refund. And if you fall into a higher tax bracket, consider consulting a tax professional for help navigating the new laws and making sure you make the right moves. Or, if you’d rather go it alone, find out how you can do your own taxes for free and find the lowest-priced paid preparer.
Keep in mind too, that tax time is a great time to check credit reports, which you can do free once a year. And it’s always a good time to track your credit regularly, which you can do for free using the Credit.com free Credit Report Card. It gives you an easy-to-understand breakdown of your credit report and your free Experian credit score that’s updated every 14 days.
This article was last published February 21, 2018, and has since been updated by another author.