I’ve been getting a lot of questions from clients about how the new tax act will affect their tax return for 2018. The answer is dependent on each individual tax situation, but the following items are the most significant changes individuals and families need to know about as they plan for and manage their income and finances in the months ahead.
- New tax brackets – There are still seven income tax brackets, but rates and income thresholds for those brackets changed, resulting in lower income tax rates for many taxpayers. A complete list of 2018 income tax rates and brackets is available at https://taxfoundation.org/2018-tax-brackets/.
- Standard deductions increase – The personal exemption (which allowed taxpayers to deduct a set amount for themselves, their spouses, and each dependent) has been repealed, but standard deductions have increased to $12,000 for single filers, $18,000 for heads of household, and $24,000 for married taxpayers filing jointly.
- Child tax credit doubles – Parents will no longer be able to claim personal exemptions for their children, but they can claim the child tax credit which doubled from $1,000 per child to $2,000 per child. $1,400 of this tax credit is refundable, meaning taxpayers can claim this much over and above their tax bill for the year, generating a refund. The child tax credit income threshold also increased but begins to phase out at an annual income of $200,000 for single parents and $400,000 for married filing jointly parents.
- Alimony payments – Alimony payments will no longer be deductible by the person paying, however this only applies to new divorce and separation agreements starting 1/01/2018.
- Itemized deductions limited or eliminated – Taxpayers may continue to choose between claiming a standard deduction or itemizing their deductions, but several of the itemized deductions have been limited or removed completely. The state and local tax deduction (SALT), is capped at $10,000 and the mortgage interest deduction is limited to loans of no more than $750,000. Also, all miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) floor were repealed along with the home equity loan interest deduction. The casualty and loss reduction remains, but will be limited to presidentially declared disasters.
- Reduction in pass-through business taxation - A pass-through business pays taxes through the individual income tax code rather than through the corporate tax code. Sole proprietorships, S corporations, partnerships, and LLCs are all pass-through businesses; C corporations are not.
The Bottom Line is that the new tax bill will affect us all from 2018 through 2025, and beyond. It will change our take-home pay as well as our tax bill at filing time. Many of the bill’s provisions require IRS guidance and must still go through a rule-writing process, so everyone should continue to pay attention as it is all ironed out in the next year.