Tax laws change every year, but the 2018 Tax Cuts and Jobs Act is one of the largest overhauls to the tax code that has taken place in over 30 years. It will vastly change the way that personal income taxes are prepared for the next decade: while the corporate tax cuts in the final bill are permanent, the individual provisions described below are set to expire in 2025.
Your 2017 tax return will not be affected by the new law, but this major change goes into effect for the 2018 tax season and beyond. Here are the chief individual tax provisions that have drastically changed the most with the frenzied passage of this bill.
Dependents, Exemptions, and Expanding the Child Tax Credit
One of the foremost changes the 2018 overhaul is bringing is in the way that taxpayers claim dependents. Personal and dependent exemptions have been eliminated in favor of virtually doubling the standard deduction for all filing statuses.
While it seems simplified and possibly more beneficial for a single filer with no dependents, families and caregivers can no longer claim multiple exemptions. However, this is expected to be offset with the Child Tax Credit has been vastly expanded. It is now available for taxpayers earning up to $200,000 ($400,000 if married filing jointly) and doubled from $1,000 to $2,000 per qualifying child. If you claimed dependents as qualifying relatives, such as parents or grandparents, you can get a nonrefundable credit of up to $500.
Above-the-Line Deductions Eliminated
Normally, you’d be able to deduct Job-related moving expenses if you moved more than 50 miles from your current residence to your new job. This deduction has been eliminated with the only exception for members of the armed forces who are changing stations or under orders to move.
Transit benefits you receive from your employer are also no longer tax-free.
Filing Statuses and Tax Rates
The marriage penalty has largely been eliminated since the income thresholds for all but the top two tax brackets have doubled for married people who file jointly. In previous years, it was possible for two people to pay a lower tax rate as single taxpayers or filing separately if their income would’ve put them in a higher tax bracket as a result of filing jointly. With the exception of couples with taxable income exceeding $400,000, the marriage penalty is no longer a concern.
Additionally, the proposal to put personal income taxes in just three brackets did not go through in the final bill. There are still seven brackets but at lower rates, with the lowest bracket still at 10% but the highest is now 37%. The middle brackets are now 12%, 22%, 24%, 32%, and 35%.
Changes were also made to the capital gains tax. Short-term capital gains are still taxed at ordinary rate but ordinary rates are much lower for seasoned investors than they were previously. The three different capital gains tax brackets now don’t completely sync with the seven income tax brackets in that while there’s 0% up to $38,600 in income ($77,200 for married filing jointly), the 15% bracket applies from $38,601 to $425,800 ($479,000 for married filing jointly) and the 20% bracket applies over those last two amounts.
The net investment income tax (NIIT) is also still in effect for high-income taxpayers. If Congress repeals the Affordable Care Act, this tax may be eliminated in the coming years.
Itemized Deductions Materially Changed or Eliminated
Given the massive increase to the standard deduction for each filing status, along with the following limitations that have been imposed, it’s expected that far fewer people will itemize than they had in the past. The chief deductions that push most people to itemize– mortgage interest, real estate taxes, and SALT (state and local income taxes)– have been subject to major changes.
Mortgage interest can only be deducted if the principal is $750,000 or less and you went under contract prior to December, 15, 2017 with a closing date preceding January 1, 2018. Mortgages that already exist are not affected by this change and you can keep deducting mortgage interest on principal up to $1 million. The interest on home equity debt is also no longer deductible regardless of the purpose or amount, when it used to be up to $100,000 providing that it was to maintain or improve your home. Any existing or new home equity loans will no longer result in deductible interest.
Real estate, personal property, general sales tax, and SALT taxes are still deductible but the limit is $10,000 for all of those taxes combined. If your real estate taxes alone exceed $10,000, you’re still limited to $10,000 total which wasn’t the case in the past. This move is expected to disproportionately impact taxpayers in high-tax states where income or real estate taxes can easily exceed $10,000 on their own.
Various itemized deductions were also eliminated such as employee business expenses as well as the other miscellaneous deductions subject to the 2% threshold. Tax preparation fees are no longer deductible. Casualty and theft losses were also cut with the only exception being losses that occurred in federally-declared disasters. Expenses not subject to the 2% threshold, such as gambling losses and legal fees for reclaiming taxable income, are still deductible. The definition for gambling losses was also expanded to include expenses incurred as part of gambling activities.
Charitable contributions and medical expenses were the only provisions that became more beneficial with the tax bill. You can now deduct donations equaling up to 60% of your income, and the standards for gifts to charity are largely unchanged although gifts to colleges in for the right to buy tickets for athletic events can’t be deducted anymore. Medical expenses still have a threshold based on adjusted gross income which rolled back from 10% to 7.5% regardless of your age. Unlike the other material changes made to the tax code, this provision also applies for qualified medical expenses in 2017.
Shared Responsibility Payment to be Eliminated in 2019
Congress did not repeal the Affordable Care Act but they did cut the individual mandate. The shared responsibility payment ("Obamacare penalty") you are charged if you don’t have health coverage and aren’t exempt is going to be eliminated. However, this penalty still applies for the 2018 tax year.
529 Plans Now Cover Private School and Tutoring
The tax benefits for higher education have been unchanged in that the tuition waiver for grad students is still in place, student loan interest is still deductible, and the Lifetime Learning Credit is still in place. But if you started a 529 plan for your child’s college education, you can now make tax-free withdrawals from these plans to pay for private school at any education level in addition to tutoring for your K-12 student.
With the exception of medical expenses which currently applies, and the penalty for lacking health insurance which isn’t until 2019, none of these provisions will affect your 2017 return but will need to be kept in mind for your 2018 tax return.