How tax reform could affect your 2018 tax bill

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In a Nutshell

Changes wrought by the Tax Cuts and Jobs Act of 2017 will affect your 2018 federal income taxes, which you’ll file in 2019. Here’s how some notable changes will alter your taxes this year.

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This article has been updated for the 2018 tax year.

When you file your 2018 federal income tax return in 2019, it will be the first year in which you’ll see the full effects of tax reform.

The Tax Cuts and Jobs Act became law on Dec. 22, 2017. Here are the central themes of the law and how the changes could affect your 2018 federal income taxes.


Changes in tax rates and brackets

Tax reform kept the number of tax brackets at seven, but lowered the tax rate for many of them. Here’s a look at the tax brackets for single filers and those married filing jointly for 2018 :

2018 TAX BRACKET THRESHOLDS 

TAXABLE INCOME BY FILING STATUS

Marginal Tax Rate

Single

Married Filing Jointly

10%

$0 to $9,525

$0 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%

More than $500,00

More than $600,000

 

The new rules maintain the marginal tax rate system. Rather than paying a flat percentage in taxes, you pay a percentage of your income for each bracket in which you qualify. Your marginal tax rate is simply the highest bracket that applies to your income.

Higher standard deduction

The standard deduction has changed. For the 2018 tax year, the standard deduction has increased to $12,000 for single filers and $24,000 for joint filers. For heads of household, the standard deduction is $18,000. The higher standard deduction levels end in 2025.

Eliminated personal exemptions

If you met income requirements in 2017, you could be eligible to take a personal exemption of $4,050 — an amount you could deduct from your total income — for yourself, your spouse and each qualifying dependent.  The personal exemption was set to rise to $4,150 in 2018, but tax reform eliminates personal exemptions for 2018 and beyond.

Changes to itemized deductions

If you usually rely on itemizing deductions to lower your tax bill, the new tax law could significantly affect your 2018 deductions.

  • State and local taxes. If you itemized for the 2017 tax year, you could take a deduction for state and local property taxes and for either state and local income taxes or state and local sales tax. Tax reform caps the amount you can deduct for state and local property taxes and income taxes (or sales tax) combined at $10,000 for individuals ($5,000 married filing jointly). If you live in a high-tax city or state, like New York or California, the elimination of this deduction could make a significant difference in your 2018 federal income tax bill.
  • Mortgage interest deduction. If you currently have a mortgage, there will be no change to your mortgage interest deduction for 2018. However, if you plan to buy a house in 2018 or get another mortgage, the new law caps the qualifying loan amount for the mortgage interest deduction at $750,000. If you live in an area with high real estate costs, this limitation could significantly affect your deductions.
  • Medical expense deduction. Previously, you were only eligible for this deduction if you had qualified medical expenses that exceeded 10% of your adjusted gross income. The new law lowers that limit to 7.5%. While the lower limit may increase the number of people who can use this deduction, the 7.5% limit is only effective for tax years between Jan. 1, 2016 and Dec. 31, 2018.
  • Miscellaneous itemized deductions: Previously, you could deduct certain expenses if the total of those expenses exceeded 2% of your adjusted gross income. Tax reform suspended all miscellaneous itemized deductions that were subject to a 2% floor. Many deductions were suspended, but among the most noteworthy are unreimbursed employee expenses such as the home office deduction, job search costs, fees for licenses, professional society dues, and tools and supplies used for work.

Additionally, the new law eliminates the income limitation on itemized deductions through the end of 2025.

Increased Child Tax Credit

For 2017, if you earned $110,000 or less and your federal income tax status was married filing jointly, you could receive a tax credit of up to $1,000 for each qualifying child younger than 17 whom you claimed as a dependent on your tax returns.

For 2018, that credit increases to $2,000 per qualifying child, and the income eligibility limit rises to $400,000 for married couples filing jointly. The credit is refundable up to $1,400 per child. Additionally, you could receive a $500 nonrefundable credit for each qualifying relative dependent you claim.

This expanded credit will end after Dec. 31, 2025.

What all this could mean for you

Multiple analyses have reached the same conclusion: The real winners of the tax reform law are corporations and high earners. Tax law changes that affect these groups include:

  • Alternative minimum tax changes: Exemption amounts for the individual alternative minimum tax, or AMT, are now pegged to inflation. The exemption amounts rise to $70,300 for single filers and $109,400 for couples who are married filing jointly in 2018. Additionally, the exemption amounts will begin to phase out at $500,000 for individual filers and $1 million for joint filers. The AMT is designed to help ensure high earners pay at least a minimum amount of tax. The change is expected to significantly reduce the number of people who will be subject to the AMT.
  • Estate tax exemption: The exemption is doubled to completely exclude from taxation inherited estates of up to $10 million in assets, which potentially rises to $11.2 million when you factor in inflation adjustments.
  • Corporate tax rate: The new tax law reduces the corporate tax rate from 35 percent to 21 percent and entirely repeals the corporate AMT.
  • Pass-through deduction: Owners, partners and shareholders of S-corporations, LLCs and partnerships may now take a deduction of 20 percent on their pass-through business income. The deduction phases out for those in a service business whose taxable income exceeds $157,500 if a single filer and $315,000 for those married filing jointly.
  • Equipment acquisition write-off: Businesses may now immediately write off the full cost of acquiring new or used equipment.

While the tax breaks for individuals generally expire on Dec. 31, 2025, the corporate tax cut is permanent.

The Joint Committee on Taxation concluded that even after accounting for economic growth, the tax reform plan would add more than $1.4 trillion to the deficit over the next decade.


Bottom line

Tax Day 2019 will arrive before you know it and with it, the deadline to file your federal income tax return for your 2018 taxes. It’s important to understand how tax reform could affect your 2018 taxes. Take steps to identify deductions or credits that could help lower your tax bill and maximize any potential refund in the 2019 tax season.