Key Provisions of the 2018 Tax Reform
The Tax Cuts and Job Act of 2018 brought about a sweeping tax reform. As one of the biggest changes to the tax code in over 30 years, it has drastically shifted many tax provisions that rarely changed. Most of the provisions in the bill will expire in 2025 with few exceptions.
There is a lot of confusion right now with items that were in the proposed bills and the final bill that passed. As it’s a lot of information to take in while you’re already busy with preparing for the 2017 filing season which kicks off on January 29, we’ve summarized the individual tax provisions most likely to affect you.
- Personal and dependent exemptions eliminated
- Child Tax Credit doubled from $1,000 to $2,000
- $500 tax credit for dependent relatives who are not children
- Credit is available to taxpayers earning up to $200,000 ($400,000 if married filing jointly)
- Medical expense deduction rolled back to 7.5% of AGI for both 2017 and 2018
- Shared responsibility payment (individual mandate penalty) no longer charged in 2019
State and Local Taxes
- SALT tax deduction limited to $10,000
- Limit is based on state and local income taxes, real estate taxes, and personal property taxes combined
- Mortgage interest deduction limited to principal of $750,000 or less
- Older mortgages for principal up to $1,000,000 grandfathered in
- Interest on home equity debt no longer deductible
Deductions That Were Eliminated
- Moving expenses for a job (except for certain members of the armed forces)
- Employee business expenses
- Casualty and theft losses (except for federally-declared disasters)
- Tax preparation fees
- Other 2% of AGI itemized deductions
Small Business and Self-Employed
- New 20% deduction for profits from pass-through businesses if total income is $157,500 or less ($315,000 if married filing jointly)
- Business entertainment deduction eliminated
Income Tax Rates
- Marriage penalty virtually eliminated
- Standard deduction virtually doubled for all filing statuses
- New tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and top tax rate is now 37%
Of the major changes made to the tax code, one of the most prominent is that personal and dependent exemptions have been eliminated in favor of a larger standard deduction. To make up the difference to taxpayers with larger families, the Child Tax Credit was expanded to apply to taxpayers in higher income brackets and doubled to $2,000 with a $1,400 refundable portion and a $500 nonrefundable credit for dependents who are not children.
Itemized deductions also underwent a massive change. As it is, only about one-third of Americans itemize on their tax returns but the Joint Committee on Taxation believes this will fall to 7% in light of both expanded standard deductions and changes to the largest items for most Americans. State and local income taxes, real estate taxes, and personal property taxes are now combined into one deduction limited to $10,000. Mortgage interest is still deductible, but the maximum principal is now $750,000 unless you were under contract by December 15, 2017, and closed by January 1, 2018, then the principal limit is still $1,000,000. Older mortgages already in place also are unaffected. However, regardless of the amount or purpose, interest on home equity debt is no longer deductible. Other itemized deductions that changed include the casualty and theft loss which has been limited to federally-declared disaster losses only, the elimination of employee business expenses, tax preparation fees, and other miscellaneous deductions subject to the 2% of AGI limit like appraisal fees for high-value charitable gifts.
Out-of-pocket medical expenses were also at a 10% of AGI threshold for most taxpayers (7.5% for age 65 and older.) The bill rolled it back to 7.5% regardless of age, and it is the only provision that goes into effect retroactively for 2017. Additionally, the shared responsibility payment for not having health insurance (and not meeting an exemption) will not be repealed until 2019.
For self-employed taxpayers, there is a new 20% deduction of business profits if total income is less than $157,500 ($315,000 if married filing jointly.) It doesn’t affect self-employment taxes, only income taxes.
Most tax brackets are now lower with the top tax rate reduced to 37%. The thresholds for each bracket have also increased. A notable change is that except for very high-income taxpayers, the marriage penalty has largely been eliminated. It was possible for two single taxpayers to have a lower rate then be pushed into a higher bracket upon filing jointly, but since the thresholds were practically doubled except for the 37% one, the marriage penalty isn’t a concern for most people now.