It was a nail-biter for taxpayers everywhere. Over a hectic few months, both House and Senate Republicans burned the midnight oil to push through major tax law changes, until the two chambers of Congress finally ironed out their differences to approve the Republican tax plan. Below are some of the big tax changes happening in 2018.
What's Changing for All Taxpayers
Lower Tax Brackets. There are still seven tax brackets, but most have shifted downward slightly — most notably, there’s a new, lower top tax rate, 37%, which is even lower than what was previously proposed by both the House and Senate. Here are where the new tax brackets would fall for individual filers and married couples filing jointly, respectively:
10% (up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
12% (over $9,525 to $38,700; over $19,050 to $77,400)
22% (over $38,700 to $82,500; over $77,400 to $165,000)
24% (over $82,500 to $157,500; over $165,000 to $315,000)
32% (over $157,500 to $200,000; over $315,000 to $400,000)
35% (over $200,000 to $500,000; over $400,000 to $600,000)
37% (over $500,000; over $600,000)
Doubled Standard Deduction. The tax plan increases the standard deduction (the amount any taxpayer can deduct to lower their taxable income) from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for those married filing jointly. These higher figures, coupled with the elimination or reduction of other types of deductions in the new bill, likely means more taxpayers would choose to take the standard deduction rather than itemize their deductions next year, as you can only do one or the other.
No More Personal Exemptions. Similar to a standard deduction, a personal exemption is a fixed amount you can deduct to lower your taxable income (that figure is currently $4,050), and you can claim a personal exemption for yourself, your spouse if you’re filing jointly, and any of your dependents. Personal exemptions are eliminated entirely in the new law.
Higher Deductions for Medical Expenses. Previous versions of the bill would have eliminated deductions for medical expenses, but instead, it’s been temporarily expanded. Previously, you could deduct medical expenses that exceeded 10% of your adjusted gross income — the new law lowers that threshold to 7.5% and would revert back to 10% starting in 2019. Another big change: Starting in 2019, you no longer have to pay a tax penalty for not carrying health insurance.
Higher Income Threshold for the AMT. The alternative minimum tax for individuals is a separate tax that higher income households typically have to pay, but the new law raises both the exemption amount (to $109,400 if you’re married filing jointly, and $70,300 for other types of filers) and the income at which the exemption starts to phase out ($1 million for those married filing jointly, and $500,000 for other filers). This means fewer taxpayers should be hit with the AMT.
What's Changing for Parents
No More Exemptions for Dependents. As mentioned above, personal exemptions that help lower your taxable income are becoming a thing of the past, including those you can take for each of your children. A family of four with two parents and two kids, for instance, would have been able to lower their taxable income by $16,200 ($4,050 for each member of the family) previously. This change would likely have the biggest impact on those with large families.
Higher Child Tax Credit. Under the new law, the child tax credit has been doubled from $1,000 to $2,000, and phases out at a higher income level: $200,000 for single parents, and $400,000 for married couples. This means parents with two kids will be able to lower their total tax bill by $4,000. You can also take a $500 credit for adult dependents you support, like an adult child or elderly parent.
529 Plans Can Be Used for Costs Outside of College. Families who send their children to private school for grades kindergarten through 12 can now use up to $10,000 a year from a 529 college savings account to help pay for tuition. Although a previous version of the bill would have allowed 529s to cover some home-schooling expenses as well, that provision was stricken at the last minute.
Also worth noting: Previous proposals would have eliminated deductions for student loan interest and would have taxed tuition waivers for graduate students, but the new bill keeps current laws for both intact.
What's Changing for Homeowners
Lower Mortgage Interest Deduction. Homeowners with existing mortgages can still deduct interest on up to $1 million of their mortgages, but those in the market for a new house will see that cap drop to $750,000 — not great news for those looking to buy pricey homes or those who live in expensive areas.
Limited Deductions on State Taxes. There had been some back and forth on whether to allow deductions for state and local taxes, a popular tax break for many taxpayers. You can still deduct state and local property taxes, and either income or sales taxes, under the new law, but at a cap of $10,000 total.
What's Changing for Businesses
Lower Corporate Tax Rate. The biggest tax break in the bill is going to businesses, who will see their corporate tax rate drop from 35% to 21% — the biggest drop in the corporate rate in U.S. history. And unlike many of the other tax changes, which would sunset in 2026, this cut would be permanent.
Lower Taxes for Pass-Through Businesses. Pass-through businesses, like S corporations, partnerships and sole proprietorships, allow business income to pass through to business owners or partners so that it is taxed at the individual’s tax rate. Under the new law, pass-through owners may be able to deduct up to 20% of their income from the business.
The passage of the new law means big changes are coming to your 2018 tax returns. So after you ring in the New Year, you may want to add “figure out my tax situation” to your list of resolutions.
This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.