Tax Cuts and Jobs Act 2018

There is good news and bad news for taxpayers!  Congress approved the Tax Cuts and Jobs Act (TCJA) in December 2017.  The provisions of this legislation take effect as of January 1,  2018.  Most of the changes related to businesses are permanent.  The changes related to individuals however, are set to expire on January 1, 2026. 

One of the intentions of the TCJA was to simplify the tax code.  Another goal was to provide tax relief for  families.  Will these objectives come to fruition?  That depends on your particular tax filing status.  While there are many positive benefits to the new law, there are also some shortcomings.  For example, the new tax law eliminates the dependency exemption ($4,050 for each dependent in 2017) but doubles both the standard deduction and the child tax credit. This means that single parents or families with many children may actually see higher tax bills, while high income earners with few or no dependents may see lower tax bills.  It is estimated that these changes will reduce the number of taxpayers who itemize by more than half.

Some good news –  If you are single, your standard deduction jumps from $6,350 to $12,000.  The standard deduction for married couples increases from $12,700 to $24,000 and from $9,350 to $18,000 for head of household.   Also, in 2018 the child tax credit is $2,000 (up from $1,000 in 2017).  For those who are unable to take the child tax credit due to income limitations, ($200,000 for individuals and $400,000 for couples) there is a $500 credit available. 

Another deduction that doubled is the estate tax exemption.  The exemption rises from $5,490,000 in 2017 to $11,800,000 in 2018.  The annual gift tax exclusion increases by $1,000 to $15,000.  The threshold for deducting medical expenses drops from 10% to 7.5% for 2017 and 2018, but reverts to 10% in 2019.  Ironically, the medical expense deduction is available only to those taxpayers who itemize, so the lower threshold  won’t be beneficial to the majority of taxpayers who are expected to take the standard deduction.

There is some bad news for home owners and mortgage holders.  In 2018, the previously unlimited deduction for property and income taxes is limited to a total of $10,000.  And the  mortgage interest deduction is limited to interest paid on $1,000,000 of mortgage debt taken out before December 16, 2017 (provided the loan closes before 4/1/18).  Beginning December 17, 2017, mortgage interest is deductible only on  mortgage loans of $750,000 or less.  More bad news – the  deduction for interest on home equity loans is eliminated for 2018 – 2025 if the proceeds are used for anything other than home improvement, or the loan increases the total mortgage debt to over $750,000. 

Another revision allows qualified education expenses previously reserved for 529 college plans to be used for K-12 tuition.  However, not all state tax laws are in synch with the federal definition of “qualified education expenses” so they may or may not be deductible on  your particular state tax return.

Beginning in 2018, you can save a little more for your retirement.  Elective 401K contributions increased slightly from $18,000 in 2017 to $18,500 in 2018, and the catch-up contribution for those 50 years and older remains at $6,000.  Total limits to  SEP contributions  of $54,000 in 2017 increased to $55,000 in 2018.  Elective IRA contribution limits in 2017 and  2018 remained the same at $5,500 with a catch-up contribution of $1,000 for those aged 50 years and older.

Some of the best news  is that the  tax brackets  have been lowered for individuals and businesses alike, although the lion share of the reductions went to businesses.  The corporate tax rate falls 14 percentage points in 2018 to 21%.  The new individual tax brackets are:

                2017 – 10/15/25/28/33/35/39.6

                2018 – 10/12/22/24/32/35/37.0

Knowing the changes to the tax code can help increase your refund or reduce your tax liability for 2018 and beyond.  It’s not too early to start tax planning to use the changes to the tax code to your benefit.