Author: Matthew Frankel, CFP | March 25, 2019
The Tax Cuts and Jobs Act
Passed in late 2017, the Tax Cuts and Jobs Act made many changes that went into effect for the 2018 tax year. Since your 2018 tax return is the one you’ll file in 2019, here are some of the ways you may be affected now and in the future.
1. Marginal tax rates have gotten lower
For the most part, tax rates have gotten lower. We still have seven marginal tax brackets, but with mostly lower rates. To illustrate this, here are the tax brackets for the 2018 tax year.
2. The marriage penalty is mostly gone
Tax reform also did away with the infamous “marriage
penalty,” except for the highest earners. Without getting too deep into a
discussion about the marriage penalty (you can read more about it here),
the short version is that in many cases, two single individuals who got married
would find themselves in a higher tax bracket, and therefore owing more federal
income tax as a married couple.
Now, the married filing jointly income thresholds are exactly double the corresponding single thresholds for all tax brackets except the highest two. This means that the marriage penalty has been written out of the tax brackets for all married couples with less than $400,000 in taxable income.
3. Your standard deduction is higher
One of the biggest selling points when Republican leaders
were pitching the Tax Cuts and Jobs Act to the American public, the standard
deduction has been roughly doubled from its old levels. If you're curious, here are guides to the 2018 Standard Deduction as well as the 2019 Standard Deduction that you'll use when filing your 2019 tax return in 2020.
However, this alone doesn’t necessarily translate to a tax break for everyone. In fact, in some cases it could work out unfavorably, as we’ll see in the coming slides.
4. The loss of the personal exemption could negate your higher standard deduction
To be fair, the standard deduction isn’t really “doubled.”
In reality, the change is more of a simplification.
Specifically, in past years, taxpayers could take advantage of the standard deduction (or itemized deductions) and the personal exemption. In the 2017 tax year, for example, each personal exemption excluded $4,100 from taxable income.
Here’s the key point. Taxpayers got one personal exemption for themselves, their spouse, and each dependent. A family of four could exclude $16,400 from their taxable income in 2017 in addition to their deductions. It’s not difficult to see why this might not work out favorably in some situations.
5. New and improved Child Tax Credit
This could certainly help offset the loss of the personal
exemption if your dependents are young
enough to qualify.
Starting with the 2018 tax year, the Child Tax Credit has been doubled from $1,000 to $2,000 per qualifying child. Not only that, but as much as $1,400 of the credit is now refundable. The catch is that to qualify, your child must be under age 17 at the end of the tax year. If any of your dependent children turned 17 before Jan. 1, 2019, you can’t use the credit for them on your 2018 tax return.
Furthermore, the credit is available to far more taxpayers now. In 2017, the Child Tax Credit started to phase out for married couples with adjusted gross income (AGI) greater than $110,000. Now, the phase-out threshold has been raised to $400,000, and has been increased in a similar manner for single filers and other statuses.
6. You can now get a credit for non-child dependents
There’s now a $500 nonrefundable credit for dependents who don’t qualify for the Child Tax Credit. For example, if you have an 18-year-old dependent child, you could use this to reduce your tax bill by $500. The same applies if you have an aging relative who you support living with you.
7. If you own an expensive home, you might not be able to deduct all of your interest
The mortgage interest deduction is one of the most
commonly-used tax breaks by Americans, and the Tax Cuts and Jobs Act made a
slight tweak to it. The deduction can now be taken for interest on a maximum of
$750,000 in qualified personal residence loan principal, down from the previous
maximum of $1,000,000. This could limit the deduction, especially for taxpayers
in higher-cost areas.
8. Home equity loan interest is not deductible if…
Under previous tax law, Americans could also deduct interest
paid on up to $100,000 of home equity debt. For example, if you borrowed
$60,000 on a home equity line of credit (HELOC), the interest would have been
Technically, the home equity interest portion of the mortgage interest deduction has been eliminated under the Tax Cuts and Jobs Act. However, there’s one big exception, as we’ll see on the next slide.
9. But, the home equity interest deduction could be even better if…
As the new tax law is interpreted by the IRS, the mortgage
interest deduction can be applied to as much as $750,000 of qualified personal
residence debt (not specifically a mortgage used to purchase the home).
What this means is that if you took out a home equity loan or utilized a HELOC and used the loan proceeds to substantially improve your home, your interest could still be deductible. For example, if you borrowed $40,000 and used it to remodel your kitchen, it can qualify as personal residence debt.
10. Highly-charitable individuals can deduct even more of their contributions
The charitable contribution deduction was left mostly the
same after the passage of tax reform. However, the deduction’s cap has been
raised from 50% of AGI to 60%. So highly-charitable individuals may be able to
deduct a little more than in previous years.
11. Do you donate to a college’s athletic department?
Another change to the charitable deduction is the treatment
of college athletic programs. If you donate to a college athletic program and
your donation gives you the right to purchase certain athletic tickets, it no
longer counts as a charitable donation. Previously, up to 80% of such donations
To be clear, if you donate money to an athletic program without receiving any benefit in return, it can still be deductible.
12. The medical expense deduction is more generous -- but just for a little while
Unreimbursed medical expenses are deductible to the extent
that they exceed 7.5% of a taxpayer’s AGI for 2018, down from 10% under the
previous tax law. This means that if your 2018 AGI is $50,000, you can deduct
any medical expenses over $3,750.
Unlike most provisions in the Tax Cuts and Jobs Act, however, this one is only valid through the 2018 tax year, unless Congress decides to extend it.
13. The SALT deduction is capped
When it comes to taxes, SALT stands for “state and local
taxes.” In past years, this has been the largest tax break used by U.S.
taxpayers by dollar amount. This includes the deduction for state income tax or
sales tax, as well as the deduction for property taxes.
The Tax Cuts and Jobs Act caps the SALT deduction at $10,000, whereas it used to be unlimited. This is likely to cause taxes to go up for many residents of high-tax states like New York and California.
14. Even if you usually itemize, you may not be able to this year
Under the previous tax law, roughly two-thirds of taxpayers
used the standard deduction each year, while the rest itemized. Under the new
law, however, the standard deduction is expected to be used on more than 90% of
In other words, if you typically itemize deductions, you may not find doing so worthwhile any longer.
15. Small business owners can use the pass-through deduction
The Tax Cuts and Jobs Act created a new deduction for
pass-through income, designed to give a tax break to small business owners. In
a nutshell, earned income that is paid via a pass-through entity like an LLC,
S-Corp, or sole proprietorship is eligible for a 20% tax deduction. This
deduction is income-restricted for certain service-oriented businesses, but it
could result in major savings for the millions of freelancers, business owners,
and other independent contractors in the United States.
16. Many more wealthy families can avoid the estate tax
Republicans have been trying to get rid of the estate tax
for a long time. They weren’t completely successful in doing so with tax
reform, but the estate tax applies to far fewer people now.
Specifically, the lifetime exemption amounts have been doubled. Under previous tax law, the estate tax applied only to the portions of estates in excess of $5.59 million per person, and this has now been doubled to $11.18 million per person (or $22.36 million per married couple).
17. You can’t deduct moving expenses anymore
Under previous tax law, Americans could deduct expenses
incurred during job-related moves. In other words, if you moved across the U.S.
for a new job, you could deduct the cost of things like a moving truck, tolls,
and lodging along the way.
The Tax Cuts and Jobs Act has eliminated the moving expense deduction, except in cases of certain active-duty military moves.
18. Casualty and theft losses aren’t deductible
This tax break is likely to hurt already-unfortunate people. Under previous tax law, casualty and theft losses were deductible. In other words, if someone broke into your house and stole things, you could at least deduct their value on your tax return. Now, this deduction has been eliminated, with the exception of losses attributable to a federally-declared disaster.
19. All of the “miscellaneous” tax deductions are now gone
There used to be an entire category of tax deductions called
“miscellaneous” deductions, which could be used to the extent that they
exceeded 2% of the taxpayer’s AGI. Common miscellaneous deductions included
- Unreimbursed employee expenses
- Investment expenses, such as investment advisory fees
- Tax preparation fees
Under the Tax Cuts and Jobs Act, all of these have been eliminated.
20. You can use your 529 Savings Plan to pay for private elementary and secondary school
If you use a 529 Savings Plan to set aside money for your child's education, the Tax Cuts and Jobs Act has expanded the allowed uses for your funds. In addition to using 529 funds for college expenses, you can now use up to $10,000 per year for qualified expenses at the elementary or secondary level.
Lots of variables
Will the Tax Cuts and Jobs Act translate to a tax cut for you? As you can see, the answer may not be that simple. The Act is the most comprehensive change to the United States tax code in about 30 years, so there are quite a few variables. While the majority of American households will indeed pay lower taxes, the impact on you depends on how many of the 20 factors I mentioned apply to you.
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