None of this will affect your 2017 taxes.
You won’t need to worry about these changes when you start filing your 2017 tax return. The new laws won’t first be applied until your 2018 taxes.
I say, lets redistribute some wealth…
What follows could sway decisions about whether to buy a home, or where to send kids to school. It could even affect when unhappy couples decide to get a divorce.
Individual provisions in the new legislation technically expire by the end of 2025. However, I expect that a future Congress won’t actually let them drop. Who knows, by then we could have a whole new idea in place.
Over the next ten years it is suggested that the reformed rules will increase deficits across the board.
As the tax overhaul bill becomes law, here are some things you need to know.
Higher standard deduction… Beginning with the 2018 tax year, the standard deduction is $12,000 for single filers and $24,000 for married couples filing jointly.
No more personal exemption… So check this out: Along with doubling the standard deduction, the bill eliminates the personal exemption, which is currently an additional $4,150 deduction (in 2018) for every taxpayer and dependent. For example, a married couple with two children would get a $11,000 boost to their standard deduction, but would lose $16,600 in personal exemptions. The higher child tax credit, which we’ll get to shortly, is supposed to help to offset this, (Keep your eye on this, it’s important to notice.)
Lower marginal tax rates… We still have seven marginal tax brackets, but with generally lower tax rates than the current 2018 tax brackets:
No more marriage penalty (for middle-class households)… In the chart, notice that for the first five marginal tax brackets, the income ranges for single filers are exactly half of those for married couples. This helps to eliminate the marriage penalty for most households.
As an example of how this works, consider that under current tax law, two single individuals who each earn $150,000 would both be in the 28% tax bracket. However, if they were to get married, their combined $300,000 income would be well into the 33% marginal tax rate. Under the proposed brackets, this couple would be in the 24% marginal tax bracket, regardless of whether they got married or not.
Higher child tax credit.. From $1,000 to $2,000, but $1,400 of this would be refundable. This rule has been in play since the Tax Payer relief act of 1997 (It started out at a max of $400). Likewise, the income thresholds where the credit phases out become far more generous.
There’s a new tax credit for non-child dependents, such as elderly parents… Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support. Children over 17 years of age, elderly parents, and adult children with a disability, are some examples.
The SALT deduction stays… The deduction for state and local taxes, also known as the SALT deduction. The SALT deduction remains, just with a $10,000 cap that applies to a taxpayer’s combined state and local property and income taxes.
Your medical expense deduction wasn’t cut… In fact, it’s been expanded for two years. In that time, filers can deduct medical expenses that add up to more than 7.5% of adjusted gross income. In the past, the threshold for most Americans was 10% of adjusted gross income.
Mortgage interest is still deductible, with a lower cap… The mortgage interest deduction remains, but will now apply to as much as $750,000 in mortgage principal. It’s down from $1 million under current law.
NOTE: Existing mortgages are grandfathered in.
Many deductions are going away… Other deductions remain, such as the itemized deduction for charitable contributions and the above-the-line deductions for student loan interest and educator classroom expenses.
- The deduction for teachers who spend their own money on school supplies was left alone. Educators can continue to deduct up to $250 to offset what they spend on classroom materials
However, many deductions are eliminated under this tax overhaul. Everything that falls under the category of “miscellaneous itemized deductions” is going away. This includes things like unreimbursed employee expenses and tax preparation costs.
No more individual mandate… You know, the law that says that everyone needs to buy health insurance or pay a penalty. In other words, beginning in 2018, you’ll be able to choose not to buy insurance and not worry about paying a penalty.
529 plans will be more flexible… In the past, funds invested in 529 savings accounts weren’t taxed — but it could only be used for college expenses. Now, up to $10,000 can be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.” This change is a win in my eyes..
Alimony payments… Alimony payments, which are ordered in divorce agreements and go to the ex-spouse who earns less money, are no longer deductible for the person who writes the checks. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018
Small-business owners and Pass-through entities get a break… The new tax overhaul allows for a 20% deduction for pass-through entities such as LLCs, S Corporations, and sole proprietorships, after which they would be taxed at their individual tax rates.
This lowers the tax burden by owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — The legislation also included a rule to ensure owners don’t “game the system”. LOL
For example, if you operate an LLC and earn $100,000 in profit in 2018, you’ll be able to deduct $20,000 before the income tax rates in the chart above would be applied.
Fewer people will have to deal with the alternative minimum tax… The alternative minimum tax, or AMT, remains in place for individuals. However, the exemptions will be increased significantly in order to make the tax better serve its intended function — ensure that the wealthy pay at least a minimum amount of tax, not potentially raise taxes on middle-class Americans.
The exemption has been raised to $70,300 for singles, and to $109,400 for married couples, so fewer people will have to worry about calculating their tax liability under the AMT moving forward.
Higher estate tax exemption… The Republican party has been trying to get rid of the estate tax for some time now, it doesn’t look like it is going away anytime soon. However, the bill doubles the lifetime exemption amount to $11.2 million per individual ($22.4 million per married couple), which will make the 40% tax apply to even fewer houses than it does now.
Deduction for moving expenses, gone… There may be some exceptions for members of the military. But most people will no longer be able to deduct the cost of their U-Haul when they move for work.
Disaster deduction… Losses sustained due to a fire, storm, shipwreck or theft that aren’t covered by insurance used to be deductible, assuming they exceeded 10% of adjusted gross income.
Now through 2025, people can only claim that deduction if they’ve been affected by an official national disaster. That would make someone whose house was destroyed by a California wildfire potentially eligible for some relief, while someone of a random house fire cannot.
Bicycle commuters… The tax code used to let you knock off up to $20 from your monthly income, for the costs of bicycling to work; assuming you weren’t enrolled in a commuter benefit program. – That’s now gone.
These aren’t permanent changes
As a final point, most of the provisions in the law expire at the end of 2025, which was necessary to keep the law from adding more than $1.5 trillion to the deficit. Congress could certainly choose to extend them before they run out, but it’s important to be aware that these aren’t permanent tax changes.
Also of note: Adjustments for inflation will be slower because the new legislation uses “chained CPI” to measure inflation for this tax overhaul. It’s a slower measure than what was used before. Over time, that will raise more money for the federal government, Our deductions, credits and exemptions will be worth less.