Unless you've been living under a rock, you're well aware that significant changes were made to federal tax laws at the end of 2017. I am completely geeking out over all of this, by the way. These changes are for this year, 2018, but keep in mind that the tax return you will soon be filing is for 2017. Below I've outlined what I consider to be the top 7 significant changes which will impact most individuals.
1. Lower Tax Rates
Tax rates are decreasing. There are still seven different tax brackets. For 2018, tax brackets range from 10% to 37%, as opposed to 10% to 39.6% for 2017. I'm not going to copy and paste the new (and old) tax tables here but below are some examples to help show the impact of this change.
Let's look at those with a filing status of married filing joint.
If your taxable income is $65,000, your regular tax (before credits and withholdings) for 2017 is $8,818. If your taxable income remains the same for 2018, your regular tax for 2018 will be $7,419. That's a decrease in tax of 15.87%.
If your taxable income is $85,000, your regular tax for 2017 is $12,728, and $10,579 for 2018. That's a decrease of 16.88%
If your taxable income is $300,000, your regular tax for 2017 is $74,217, and $60,579 for 2018. That's a decrease of 18.38%
If your taxable income is $1,000,000, your regular tax for 2017 is $341,231, and $309,379 for 2018. That's a decrease of 9.33 percent.
(The chances of a taxpayer's taxable income remaining the same for 2017 and 2018 is unlikely considering other changes to the calculation of taxable income. I've provided these examples to show the impact to different levels of taxpayers.)
2. Standard Deduction Almost Doubles
The standard deduction for all taxpayers will be almost double that of 2017. For single taxpayers, the standard deduction moves from $6,350 to $12,000. For married filing joint, that increase is from $12,700 to $24,000. Before you get too excited, see the next change. It's a big one.
3. Goodbye, Personal Exemptions
A personal exemption is a deduction from adjusted taxable income for you, your spouse (if married filing joint) and dependents. Each person I've listed amounts to a deduction of $4,050. So if you are married filing joint and you have two dependents, your total personal exemption would be $16,200 for 2017. This is going away for 2018 for everyone.
So even though your standard deduction increases by $11,300, if you are a family of four, you will be losing $16,200 of exemptions. But not all hope is lost. See the next change.
This law change to me is a real kick in the teeth. For 2017, the personal exemption is phased out at higher income levels. This means that if you report taxable income above a certain amount, the personal exemption is reduced and then eventually not allowed. Married filing joint taxpayers with more than $437,000 in taxable income can't reduce income for personal exemptions anyway so this change will mean absolutely nothing to them. For the uber-rich, this isn't a change at all.
4. Increase to the Child Tax Credit
The child tax credit will increase to $2,000 from $1,000. The credit will also have a refundable portion of $1,400. For 2017, none of the credit is refundable. This does offer some relief for families with children under the age of 17. If your children are over 17, there will be a $500 nonrefundable credit available. The new bill has also significantly increased the phase-out threshold. For example, for married filing joint taxpayers, that threshold is $110,000 for 2017. That has now been increased to $400,000. I've always thought the threshold was too low, especially for high cost of living areas.
5. State and Local Tax Deductions Are Capped
This change has been noted as the most controversial. If you itemize your deductions on Schedule A, your state tax deduction (income, property, sales) will be capped at $10,000. This is a huge hit to many taxpayers, especially for those who live in high tax states, such as California and New York. Massachusetts is up there as well.
Currently, 70% of taxpayers take the standard deduction. That is expected to jump to over 90% in 2018 due to changes in the calculation of Schedule A deductions.
6. Changes to Home Mortgage Interest Deduction
For new home purchases, you will be able to deduct interest on mortgage debt up to $750,000. That cap has been lowered from $1,000,000.
You are no longer allowed to deduct interest paid on home-equity loans. Note that there is no grandfathering of loans made prior to 2017.
7. Removal of Health Insurance "Penalty"
If you do not have proper health insurance coverage for 2017 and 2018, you are required to pay an additional "tax." That will no longer be the case starting in 2019.
* This information should not be used as tax advice. Please consult your tax advisor with questions specific to your tax situation.