If you’re like most taxpayers, chances are you haven’t read The Tax Cuts and Jobs Act, which is understandable as the tax reform legislation is over 500 pages long and can be confusing and hard to understand for the average taxpayer. The good news is we’ve read through the new tax law and we can help you understand some of the major changes that will affect you and your business! Here is part one of our series of going through the different tax law changes and letting you know what the changes are and how they will affect you!
One of the biggest changes is to the tax brackets for all taxpayers. Below are the new tax brackets for Single fliers and Married Filing Jointly. While the number of brackets remained the same, the rates overall have dropped. The lower rates are scheduled to expire in 2025 unless Congress extends them.
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up To $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
Standard deduction and personal exemption
One of the biggest changes with The Tax Cuts and Jobs Act affects your standard deduction. The standard deduction for single filers will jump to $12,000. For those filing Married Filing Jointly, your deduction will jump to $24,000. For 2018, the additional standard deduction amount for the aged or the blind is $1,300. The additional standard deduction amount increases to $1,600 for unmarried taxpayers. For 2018, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,050 or the sum of $350 and the individual’s earned income.
There will be no personal exemption amounts for 2018.
The Child Tax Credit
The Child Tax Credit is designed to give an income boost to the parents or guardians of dependent children. For 2017, the child tax credit was up to $1,000 per child. For 2018, the Child Tax Credit has been expanded up to $2,000 per qualifying child and is refundable up to $1,400 subject to phaseouts. There is also a temporary $500 nonrefundable credit for other qualifying dependents. Phaseouts will begin with an Adjusted Gross Income of more than $400,000 for Married Filing Jointly and more than $200,00 for all other taxpayers.
Earned Income Tax Credit
For 2018, the maximum Earned Income Tax Credit ( EITC) amount available is $6,431 for taxpayers filing jointly who have three or more qualifying children. Income phaseouts do apply. You can read about the maximum credit amounts for other categories and the income thresholds here.
The credit allowed for an adoption of a child with special needs is $13,810. The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,810. Phaseouts apply beginning with your modified adjusted gross income (MAGI) more than $207,140. It is completely phased out for taxpayers with an MAGI of $247,140 or more.
Student Loan Interest Deduction
Students paying off their loans from college still have the opportunity to deduct the loan interest on their tax returns. For 2018, the maximum amount you can deduct for interest paid on student loans remains at $2,500. Phaseouts do apply for taxpayers with MAGI more than $65,000.
Student loan debt discharge
As of January 2018, discharged student loan debt is no longer considered income. Any student loan debt that is discharged due to death or total and permanent disability (TPD) is no longer taxable. Make note that this is not a retroactive law. Anyone awarded TPD student loan discharge during the 2017 tax year will still have to pay taxes come April 2018. The new law covers eligible loans discharged from January 1, 2018 to December 31, 2025. Only loans discharged during this time are tax exempt. The bill expires in 2025, but it can be renewed by Congress.
A change that could disproportionately affect those living in certain states is the restriction on the amount of mortgage interest that can be deducted. Before, taxpayers could deduct interest on a mortgage of up to $1 million. Now, in 2018, taxpayers can only deduct interest on the mortgage value up to $750,000. The IRS recently announced that even with the new restrictions, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or a second mortgage, regardless of how the loan is labeled. Specifically, the new law eliminated the deduction for interest paid on home equity loans and lines of credit through 2026, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Good news for those who like to give to charities, your deduction got bigger for 2018! The percentage limit for charitable cash donations by an individual taxpayer to public charities and other certain organizations has increased from 50% to 60%!
Medical Expenses & Medical Savings Account
Your medical and dental expenses deduction did take a small hit with the new tax law. Taxpayers can only deduct medical and dental expenses that are 7.5% of your AGI. This is down from 10%.
For 2018, a high-deductible health plan (HDHP) has an annual deductible that cannot be less than $2,300 but cannot exceed $3,450. This is for those who have a self-only coverage. The maximum out-of-pocket expense amount for self-only participants is $4,550. For those with family coverage on an HDHP, you get an annual deductible amount that is not less than $4,550 but cannot exceed $6,850. The maximum out of pocket expenses for family coverage is $8,400.
State and Local Taxes Deduction
One of the most contested changes on the tax reform bill is the changes to your state and local taxes deduction (SALT). While your deductions for state and local income, sales and property tax remain available, the new law placed on cap on the deduction. The maximum amount you can claim for SALT deductions is $10,000. Some states are currently suing the U.S. government over the SALT deduction cap.
If you’re still confused about the tax law changes or aren’t sure how to adapt your finances or business to the new law, Polston Tax can help. Our team of IRS tax attorneys and tax accountants know all the changes with the new tax law and can help you understand what is best for your financial situation. Call us today at 844-841-9857 or click below to schedule a free consultation!