When the Tax Cuts and Jobs Act (TCJA) was signed into law in late 2017, it set in motion the most dramatic overhaul of the federal income tax system since the 1980s.
The new law generated many headlines about reduced taxes for businesses. But it also will bring some significant changes to the amounts individual taxpayers end up owing the IRS, starting this year and generally running through 2025. The sweeping legislation affects everything from income tax rates, deductions and credits to the alternative minimum tax (AMT) and the estate tax.
Your Tax Bracket and Rate
Like the previous tax system, the TCJA employs seven income tax brackets. But it adjusts the respective tax rates from 10%, 15%, 25%, 28%, 33%, 35% and 39.6% in 2017 to 10%, 12%, 22%, 24%, 32%, 35% and 37% for 2018–2025. After that, the rates will revert to the 2017 levels unless Congress acts to extend the lower rates.
The threshold incomes for the seven brackets also have been adjusted. For example, for 2018 the 37% rate will apply when taxable income exceeds $500,000 for single filers and $600,000 for joint filers. For 2017, the highest rate kicked in at $418,400 and $470,700. The new thresholds will be indexed for inflation through 2025.
Your Deductions — Standard and Otherwise
First, the standard deduction: The TCJA almost doubles it compared to 2017, to $12,000 for single filers and $24,000 for joint filers, through 2025. These deductions will be adjusted for inflation beginning in 2019.
The raised standard deduction is intended to reduce the number of taxpayers who itemize their deductions. To that end, the TCJA also substantially restricts some of the most popular itemized deductions.
For example, the deduction for state and local taxes is limited to $10,000 for the total of state and local property taxes and income or sales taxes, through 2025. The mortgage interest deduction is also cut back. Taxpayers can deduct interest only on mortgage debt of $750,000 ($1 million for mortgage debt incurred before December 15, 2017).
Some other itemized deductions also will be curtailed for 2018–2025. For example, miscellaneous itemized deductions subject to the 2% floor, such as investment expenses and unreimbursed employee business expenses, have been suspended. And the deduction for personal casualty and theft losses survived the new law, but is allowed only for casualty losses attributable to a federally declared disaster.
There are also changes to “above-the-line” deductions. For instance, for divorces finalized after 2018, alimony payments won’t be deductible for the paying spouse ― though, on the plus side, they won’t be taxable for the receiving spouse.
Your Family-based Breaks
The TCJA expands the availability of various family tax credits to help mitigate the loss of the personal exemption. For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and dependents, but the TCJA repeals the exemption for 2018–2025.
During that period, it boosts the child credit to $2,000 per child under age 17. And it extends the credit to more families by lifting the phaseout thresholds to $400,000 in adjusted gross income for married couples and $200,000 for other filers.
For 2018–2025, the TCJA also establishes a temporary $500 nonrefundable credit for qualifying dependents other than children, such as a dependent child age 17 or older.
Other Tax Liabilities
Despite efforts by the House of Representatives to repeal both, the AMT and the estate tax live on. However, the TCJA narrows the number of taxpayers who will run into them for 2018–2025.
For 2018, it increases the AMT’s exemption amounts to $109,400 for married couples and $70,300 for all other taxpayers except estates and trusts and raises the exemption phaseout thresholds to $1 million for married couples and $500,000 for all other taxpayers except estates and trusts. These amounts will be adjusted for inflation through 2025.
The law also doubles the estate tax exemption through 2025, to $10 million, adjusted for inflation. The inflation-adjusted exemption is currently expected to be approximately $11.2 million for 2018, although, as of this writing, the number hasn’t been finalized.
529 Plans Just Became More Valuable
The TCJA also expands the popular Section 529 plan, which many families use to grow their savings tax-free for their children’s college. Distributions from 529 plans are tax-free when applied to qualified expenses, including tuition, fees, books, room and board, and the purchase of any computer technology or equipment, Internet access or related services.
Under the TCJA, taxpayers can use tax-free 529 plan distributions to fund qualified expenses not just for higher education but also for elementary and secondary school education. But it limits plan distributions for K-12 expenses to $10,000 each year. The limitation applies on a per-student basis, not a per-account basis. So a student with multiple accounts may nonetheless receive no more than $10,000 in tax-free distributions annually.
More than 30 states allow income tax deductions or tax credits to encourage 529 plan saving.
The Road Ahead
At almost 500 pages, the TCJA contains numerous far-reaching provisions that might affect your taxes going forward. Your CPA can help you navigate the law and minimize your tax liability.