Here is a quick overview of the changes and details on how they may affect your taxes.
Standard versus itemized deductions
A major change is the large increase in the standard deduction. For tax years 2018 through 2025, the standard deduction will be $12,000 for single filers and $24,000 for married couples filing jointly. That’s close to double the levels in 2017. The law also slightly increases the higher standard deduction for the elderly, the blind, and persons with a disability. But it eliminates the $4,050 personal exemption.
Changes to deductions and credits
Items that remained unchanged include capital gains rules for the sale of a primary residence, deductions for student loan interest, treatment of tuition waivers, adoption assistance, investment interest, teachers’ out-of-pocket expenses, and the credit for electric car purchases.
Many important retirement savings incentives were unchanged as well, including deductions for 401(k)s, traditional IRAs, and health savings accounts (HSAs).
On the other hand, there were a wide range of other deductions and credits that were changed, added, or eliminated, including:
|Dependent credit (other than child)
|$500 credit per qualifying dependent
|Child/dependent tax credit
|$1,000 credit per qualifying child < age 17 (modified adjusted gross income [MAGI] limit $110,000 MFJ/$75,000 single)
|$2,000 credit per qualifying child < age 17 (MAGI limit $400,000 MFJ/$200,000 single)
|Deductible (move >50 miles for a new job)
|State and local taxes
|Deductible (property and sales or income tax)
|Capped at $10,000 of expenses (property and sales or income tax, regardless of filing status)
|Limited to interest on $1,000,000 of debt on primary or secondary home
|Limited to interest on $750,000 of debt on primary or secondary home (no change for existing mortgages)
|Home equity loan interest deduction
|Limited to interest on $100,000 of debt
|Eliminated (does not apply to home equity loans for substantial home improvements that comply with debt limit)
|Medical expense deduction
|Deductible if >7.5% of AGI
|No change for 2018
>10% of AGI 2019–2025
|Casualty and theft
|Deductible if >10% of AGI
|Eliminated (except in the case of federally recognized natural disaster)
|Deductible by the payer;
taxable to the payee
|The deduction for the payer is eliminated;
included in income – eliminated
|Investment interest expense
|Deductible up to the amount of net investment income
|Miscellaneous expenses, including: Tax prep fees, Investment advisory fees, Unreimbursed work expenses (travel, parking, meals, and entertaining), Depreciation on phone or computer required for work, Investment expenses, Job search expenses
|Deductible in excess of 2% of AGI
|Charitable gifts of cash
|Limited to 50% of AGI
|Raised to 60% of AGI
Other major changes
The tax reform law included many other major changes for individual taxpayers. For one, the new law eliminates the Pease phaseout on itemized deductions for taxpayers with high AGIs from 2018 to 2025. In addition, the law made changes to the alternative minimum tax (AMT) and was designed to reduce the number of taxpayers forced to pay using that system.
The law also created a new opportunity for education funding, allowing taxpayers to use 529 accounts to fund up to $10,000 of K–12 qualified tuition expenses per student each year, in addition to the existing uses for higher education.
|AMT exemption, single
|AMT exemption, MFJ
|Pease itemized deduction phaseout, single
|Started at $261,500
|Pease itemized deduction phaseout, MFJ
|Started at $313,800
|529 education savings
|Qualified higher education expenses
|Expanded to include up to $10,000 in K–12 tuition per beneficiary per year
New tax rates
Tax reform also reset the tax brackets, setting new income thresholds and tax rates, while retaining the total number of 7 brackets. It’s worth remembering that the tax code is progressive, so your marginal tax rate is the top tax rate you pay—the rate you would pay on an additional dollar of income. But you will generally pay taxes at a variety of rates, depending on your taxable income.
How these changes play out
Taken together, these changes will dramatically change the tax-filing experience for many Americans. For some, it will simplify the process. Because the higher standard deduction will exceed the value of itemized deductions for many taxpayers, the Tax Policy Center estimates that more than 25 million families will stop itemizing in 2018—that’s more than half the number of people who have itemized in recent years.
However, the total impact of the changes to rates and deductions will vary dramatically from one taxpayer to another.
The bottom line—run the numbers
One of the goals of tax reform was simplicity through standard deductions and higher exclusions for the AMT. For some, it will still make sense to itemize, but many deductions have changed. So, if you’ve considered the tax implications of a charitable giving program, property taxes, mortgage debt, or home equity debt, you’ll need to carefully examine how things will change starting in 2018.
If you have questions, it makes sense to work with us to see how the law may affect you, and whether there are strategies you should consider to help manage your tax situation going forward.