“ The new tax law nearly doubles the standard deduction, to $12,000 from $6,350 for single filers, and to $24,000 from $12,700 for married filers.”
The Tax Cuts and Jobs Act (TCJA) of 2017 was one of the most sweeping tax code overhauls in decades. The majority of its provisions kicked in January 1, 2018, and most of the changes will expire at the end of 2025 unless Congress extends them. Below are some of the more impactful changes:
Tax rates and brackets have changed.
The new law keeps seven tax brackets but makes significant changes to the tax rates. The new tax rates and brackets work in unison and should result in lower tax bills for the majority of taxpayers.
The standard deduction has increased.
The new tax law nearly doubles the standard deduction, to $12,000 from $6,350 for single filers, and to $24,000 from $12,700 for married filers. About 70% of taxpayers claim the standard deduction, which includes most low- and middle-income households. The increased standard deduction combined with the new increased child tax credit (read more below) should lower the tax bills of the majority of these households.
Some itemized deductions have been reduced or eliminated.
The new law reduces or eliminates many itemized deductions in favor of a higher standard deduction. These changes include the following:
The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
The mortgage interest deduction is limited to $750,000 of indebtedness. However, those who had $1,000,000 of home mortgage debt prior to December 12, 2017, will still be able to deduct the interest on that loan.
All miscellaneous itemized deductions are eliminated. This includes deductions for tax preparation fees, investment advisor fees and unreimbursed job expenses.
All else being equal, if you're in a high-income household in a high-tax state, with a large mortgage and high property taxes, these changes could end up increasing your tax liability. However, some of the negative impact will be offset by the changes to the tax rates and brackets.
The child tax credit has increased.
The new tax law increases the child tax credit to $2,000 from $1,000, and the income level of households eligible for the credit has also increased. Households with incomes below $200,000 as a single filer or $400,000 as a joint filer can claim this tax credit.
The personal exemption and dependent deduction have been eliminated.
The new law eliminates the personal exemption and dependent deduction.
The alternative minimum tax (AMT) was changed but not eliminated.
The new law increases both the exemption and the exemption phase-out amount for the individual AMT. Beginning in 2018 and ending in 2025, the AMT exemption amount increases to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers. The phase-out thresholds increase to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers.
The taxation of income from pass-through entities has changed.
This is a complex area of tax law, and the new law includes numerous changes to the taxation of income from pass-through entities such as S corporations, limited-liability corporations and partnerships. In general, the new law allows businesses to exclude 20% of their net income from taxation, subject to certain limitations. The deduction could also be limited or disallowed for specified service trades—such as lawyers, doctors and accountants-based on an income threshold. Please see the related article on this provision in the newsletter.
The corporate tax rate has declined.
The new tax law reduces the corporate tax rate to a flat 21% from the highest 35% rate in the prior system.
It's important to remember that the impact of any of these changes on your personal tax liability will depend on your specific circumstances. In addition, the individual components of your taxes, including earned income, credits, deductions and other factors, work together like interacting cogs. So, each of these tax changes should not be assessed solely in isolation.