Author: Dan Caplinger | March 01, 2018
How will you be affected?
The biggest tax reform effort in decades just got passed in Washington late last year, and nearly every American taxpayer can expect to encounter major changes to the way that their taxes look. You won't see the impact of the Tax Cuts and Jobs Act on the returns you're preparing right now for your 2017 tax year, but most of the rules formally took effect on Jan. 1. Here are just some of the dozens of ways that new tax laws could affect you.
1. Lower tax rates
Tax reform reduced the rates on six out of the seven existing tax brackets. The 10% and 35% brackets have the same rates, but reductions include the 15% bracket falling to 12%, as well as 25% to 22%, 28% to 24%, 33% to 32%, and 39.6% to 37%. These reductions are small, but they add up to big savings for many taxpayers.
2. A bigger standard deduction
The standard deduction in 2018 will almost double from 2017 levels. Taxpayers can expect to deduct $12,000 if they're single or $24,000 if they file jointly, up from the $6,500 and $13,000 standard deductions that would have taken effect in 2018 if the old tax laws hadn't been replaced.
3. No more personal exemptions
The personal exemption writeoff will disappear starting in 2018. Under former law, you could reduce your taxable income by $4,050 in 2017 for yourself as well as for most dependents. Many see the disappearance of the personal exemption as the tradeoff for the bigger standard deduction.
4. Bigger child tax credits
The amount of the child tax credit was doubled from $1,000 to $2,000, with up to $1,400 of that amount eligible for taxpayers to take as a refundable credit even if they don't have other tax liability against which to claim the credit. More taxpayers will be able to take the credit as well, because the income thresholds under which you can take the credit are rising to $200,000 for singles and $400,000 for joint taxpayers.
5. New credits for other dependents
In addition to the child tax credit, you can also claim a $500 tax credit for dependents who aren't eligible for the child credit. This includes children who are 17 or older, as well as elderly relatives whom you take care of. The credit is nonrefundable, but it compensates for the loss of a personal exemption for those individuals.
6. Limited itemized deductions for state and local taxes
Until 2018, you could deduct an unlimited amount of money you paid toward state income or sales tax as well as state and local property tax. Tax reform put a $10,000 limit on the amount of state and local taxes you're able to take as an itemized deduction. That's a headache for many of those in higher-tax states, but it's less draconian than the full repeal that some lawmakers had wanted.
7. Reductions in deductible mortgage interest
Tax reform eliminated the itemized deduction for mortgage interest paid on home equity debt, which in the past had been allowed for up to $100,000 in outstanding borrowings. The new rule also limits deductible interest on new mortgages to $750,000, although existing mortgages will get to use the old $1 million limit.
8. A more generous medical expense deduction
On the other hand, taxpayers will be able to deduct medical expenses that exceed 7.5% of their adjusted gross income. Under former law, most people could only claim a deduction on such expenses if they were greater than 10% of AGI. This is also one of the only changes that applies retroactively to the 2017 tax year, meaning you can use it on your taxes that you're filing right now.
9. No more moving expense deductions
Old law allowed you to deduct expenses if you moved in order to pursue a new job. That provision goes away in 2018, so your 2017 return will be the last time you'll be able to claim such a deduction if it applied.
10. Several miscellaneous deductions will disappear
Tax reform also eliminated most of the writeoffs that counted as miscellaneous itemized deductions. These included things like tax preparation costs and unreimbursed employee expenses. The fact that these deductions were limited to costs above 2% of adjusted gross income made them less commonly taken, but their loss will still hurt some taxpayers.
11. Marriage penalties disappear for most taxpayers
Under the new tax brackets, the income thresholds for married people who file jointly are exactly double the thresholds for singles with the exception of the top 37% bracket. That's a substantial change from old law, where every bracket above the 15% level had joint thresholds of less than twice the single thresholds that caused a potential marriage penalty. Two-earner families could see substantial savings under tax reform as the former marriage penalty goes away, and some single-earner families will get an additional windfall, especially if they have high incomes.
12. Alternative minimum tax will be less of a problem
Tax reform also changed how the alternative minimum tax works. Higher exemptions will make fewer people subject to the tax, while a big increase in the income thresholds at which those exemptions start to disappear will ensure that many of those who currently pay AMT will get a partial reduction or total elimination of their AMT tax bills in 2018 and beyond.
13. Estate tax exemptions have doubled
Tax reform doubled the value of the lifetime estate and gift tax exclusion. You can now pass up to $11.2 million in wealth to future generations without having to pay estate tax. With a rate that remains at 40%, avoiding the estate tax is still as important as ever, but it's also a lot easier for the vast majority of taxpayers.
14. Lower business tax rates will help some workers
The new tax laws cut the corporate tax rate from 35% to 21% and also offer some added deductions for those who have businesses other than corporations. Business owners will see immediate positive impacts from those measures. But even some employees are benefiting from the tax cuts, as employers pass on some of their tax savings to workers in the form of one-time bonuses, permanent salary increases, or contributions to profit sharing or other retirement-oriented programs.
15. Your take-home pay will probably go up
Even though you won't see savings on your tax return until you file your 2018 taxes early in 2019, workers are already seeing the impacts of lower rates in their tax withholding on their paychecks. Earlier this year, the IRS implemented lower payroll withholding rates that resulted in typical workers' checks going up. Some of those rises will be minor, but they'll still add up to considerable savings in many cases from tax reform efforts.
Save as much as you can
In order to make the most of tax reform, you need to know what all of its provisions are. By being aware of where you can save, you'll be in a better position to plan your taxes effectively in 2018 and beyond.
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