Half-Time: Taking Stock of the Tax Changes
The Tax Cuts and Jobs Act passed in 2017 changed the federal tax landscape for both individuals and businesses. Many of the provisions in the legislation are permanent, but many others (including most of the tax cuts that apply to individuals) expire at the end of 2025. Here are some of the significant changes to factor in to tax planning right now.
New lower marginal income tax rates
In 2018, there are seven marginal income tax brackets, and most of the rate thresholds have dropped from last year. The new rate levels are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Some people may actually pay more tax and be in a higher top marginal rate than they would have last year. Consider how the new rates will affect you based on your filing status and estimated taxable income.
Higher standard deduction amounts
Standard deduction amounts are nearly double what they were last year, but personal exemptions are no longer. Personal exemptions were an amount per person ($4,050 in 2017) that you could deduct for yourself, spouse and/or dependents. Additional standard deduction amounts allowed for the elderly and the blind are available for those who qualify. If you are single or married without children, the increase in the standard deduction more than makes up for the loss of personal exemption deductions. However, if you have a family of four or more, the math does not work out in your favor, and you’ll pay more in taxes.
Itemized deductions — the good and the bad
Some good news: the overall limit on itemized deductions that applied to higher-income taxpayers is repealed, the income threshold for deducting medical expenses is reduced for 2018, and the income limitations on charitable deductions are eased. The bad news is that the deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area, and miscellaneous itemized deductions that would have been subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.
Other deductions changed include:
- State and local taxes— Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
- Home mortgage interest deduction— Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity loans or lines of credit unless the debt is used to buy, build or substantially improve a principal residence or a second home.
Other important changes
- Child tax credit — The credit has been doubled to $2,000 per qualifying child, refundability has been expanded, and the credit will now be available to many who didn’t qualify in the past based on income; there’s also a new nonrefundable $500 credit for dependents who aren’t qualified children for purposes of the credit.
- Alternative minimum tax (AMT)— The Tax Cuts and Jobs Act significantly narrowed the reach of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.
- Roth conversion recharacterizations— In a permanent change that starts this year, Roth conversions can’t be “undone” by recharacterizing the conversion as a traditional IRA contribution by the return due date.