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14 Ways the Tax Cuts and Jobs Act Could Change Your 2018 Taxes

By Matthew Frankel, CFP® - Dec 18, 2017 at 6:23PM

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Here's how the final version fo the GOP tax bill affects individual income taxes.

The final version of the Tax Cuts and Jobs Act was released by congressional Republicans late last week, and is likely to be voted on soon by both chambers of Congress in the next few days. If it passes both the House of Representatives and the Senate, it would then go to President Trump's desk to be signed into law.

The bill contains many tax changes, so here's a quick rundown of the major changes on the individual side. As a terminology note, the compromised version of the bill that is set to be voted on is known as the "conference agreement."

Money scattered on top of US tax forms.

Image source: Getty Images.

1. Higher standard deduction

This one shouldn't come as a surprise, as it was included in both the House and Senate versions of the bill. Beginning with the 2018 tax year, the conference agreement would nearly double the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly.

2. No more personal exemption

Here's the catch: Along with doubling the standard deduction, the bill eliminates the personal exemption, which is currently an additional $4,150 deduction (in 2018) for every taxpayer and dependent. For example, a married couple with two children would get a $11,000 boost to their standard deduction, but would lose $16,600 in personal exemptions. The higher child tax credit, which we'll get to shortly, should help to offset this, but it's still important to notice.

3. Lower marginal tax rates

The final version of the bill didn't do much to simplify the tax code, at least in regards to the tax brackets. We'll still have seven marginal tax brackets, but with generally lower tax rates than the current 2018 tax brackets. Here's how the tax brackets turned out in the final version of the bill:

Marginal Tax Rate

Single

Married Filing Jointly

Head of Household

Married Filing Separately

10%

$0-$9,525

$0-$19,050

$0-$13,600

$0-$9,525

12%

$9,525-$38,700

$19,050-$77,400

$13,600-$51,800

$9,525-$38,700

22%

$38,700-$82,500

$77,400-$165,000

$51,800-$82,500

$38,700-$82,500

24%

$82,500-$157,500

$165,000-$315,000

$82,500-$157,500

$82,500-$157,500

32%

$157,500-$200,000

$315,000-$400,000

$157,500-$200,000

$157,500-$200,000

35%

$200,000-$500,000

$400,000-$600,000

$200,000-$500,000

$200,000-$300,000

37%

Over $500,000

Over $600,000

Over $500,000

Over $600,000

Data source: Joint Explanatory Statement of the Committee of Conference.

4. No more marriage penalty (for middle-class households)

In the chart, notice that for the first five marginal tax brackets, the income ranges for single filers are exactly half of those for married couples. This helps to eliminate the marriage penalty for most households.

As an example of how this works, consider that under current tax law, two single individuals who each earn $150,000 would both be in the 28% tax bracket. However, if they were to get married, their combined $300,000 income would be well into the 33% marginal tax rate. Under the proposed brackets, this couple would be in the 24% marginal tax bracket, regardless of whether they got married or not.

5. Higher child tax credit

Increasing the child tax credit has been a major focus for Ivanka Trump, as well as for some key Republican senators such as Marco Rubio of Florida. Because of their efforts, not only would the child tax credit be doubled to $2,000, but $1,400 of this would be refundable. Furthermore, the income thresholds where the credit phases out would get far more generous.

6. The SALT deduction stays

The deduction for state and local taxes, also known as the SALT deduction, is the largest tax deduction under current law, in terms of dollar volume. And as you may imagine, taxpayers in high-tax areas such as New York and California use this deduction more than most.

Because of this, the potential elimination of the SALT deduction has been one of the most closely watched provisions in the tax reform saga. However, in the latest version of the bill, the SALT deduction remains, just with a $10,000 cap that applies to a taxpayer's combined state and local property and income taxes.

7. The medical expense deduction would get larger

Not only would the medical expense deduction kick in at 7.5% of AGI for all taxpayers, as opposed to 10% currently, but this change would be retroactive to the 2017 tax year. In other words, a married couple with AGI of $100,000 will now be able to write off medical expenses above $7,500 -- $2,500 less than under current law.

8. Mortgage interest is still deductible, with a lower cap

The mortgage interest deduction remains, but will now apply to as much as $750,000 in mortgage principal, down from $1 million under current law. However, existing mortgages are grandfathered in.

9. Many deductions are going away

Some other deductions remain, such as the itemized deduction for charitable contributions and the above-the-line deductions for student loan interest and educator classroom expenses.

However, many deductions are eliminated under the bill. Everything that falls under the category of "miscellaneous itemized deductions" is going away. This includes things like unreimbursed employee expenses and tax preparation costs.

10. No more individual mandate

Republicans were unsuccessful in their efforts to repeal the Affordable Care Act earlier this year, but the Tax Cuts and Jobs Act will get rid of the individual mandate -- that is, the law that says that everyone needs to buy health insurance or pay a penalty.

In other words, beginning in 2018, you'll be able to choose not to buy insurance and not worry about paying a penalty.

11. 529 plans will be more flexible

The conference agreement expanded the acceptable use of 529 college savings plans to include as much as $10,000 per year for secondary and/or elementary school expenses (including home-school costs). Currently, funds in these plans are only available for post-secondary expenses.

12. Small-business owners get a break

The bill would allow a 20% deduction for pass-through entities such as LLCs, S Corporations, and sole proprietorships, after which they would be taxed at their individual tax rates. For example, if you operate an LLC and earn $100,000 in profit in 2018, you'll be able to deduct $20,000 before the income tax rates in the chart above would be applied.

13. Higher AMT exemptions

The alternative minimum tax, or AMT, would remain under the conference agreement. However, the exemptions will be increased significantly in order to make the tax better serve its intended function -- ensure that the wealthy pay at least a minimum amount of tax, not potentially raise taxes on middle-class Americans.

14. Higher estate tax exemption

Republicans have been trying to get rid of the estate tax for some time now, and it doesn't look like it is going away anytime soon.

However, the bill doubles the lifetime exemption amount to $11.2 million per individual ($22.4 million per married couple), which will make the 40% tax apply to even fewer houses than it does now.

These aren't permanent changes

As a final point, most of the provisions in the bill expire at the end of 2025, which was necessary to keep the bill from adding more than $1.5 trillion to the deficit. Congress could certainly choose to extend them before they run out, but it's important to be aware that these aren't permanent tax changes.

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