The Tax Cuts and Jobs Act was signed into law on December 22, 2017 and most provisions took effect on January 1, 2018. So what does that mean for your tax liability? Here are ten ways your tax return will look a little bit different next April:
1. The standard deduction has nearly doubled. In 2017 the standard deduction for individuals was $6,350; $9,350 for heads of household; or $12,700 for married couples filing jointly. Beginning in 2018, an individual can claim a standard deduction of $12,000; $18,000 for head of household; or $24,000 for married couples filing jointly. This means a lot of people who previously itemized deductions such as mortgage interest and charitable donations will get a better deal with the standard deduction.
2. Beginning in 2018, personal exemptions are suspended through 2025. Previously, taxpayers could reduce their adjusted gross income (AGI) by claiming personal exemptions – typically the taxpayer, their spouse and dependents. The AGI could be reduced by $4,050 per exemption. This AGI reduction will no longer be available.
3. The Child Tax Credit doubles to $2,000 per qualifying child. In addition, the new tax law makes the child tax credit a refundable credit, meaning you could reduce your tax liability to zero and still receive part of the credit, up to $1,400, as a refund.
4. Taxpayers who still itemize their deductions will be permitted to deduct medical expenses that exceed 7.5% of their adjusted gross income. Previously, the threshold for the deduction was 10% of AGI.
5. Beginning in 2018 the mortgage interest deduction is limited to mortgages valued up to $750,000 of principal value on a new home. This is down from the previous allowance of mortgage interest deduction for mortgages valued up to $1 million. However, this change only applies to new purchases. The old, $1 million cap continues to apply to mortgages in place before December 15, 2017.
6. Under old rules, taxpayers could include state and local property, income and sales taxes as itemized deductions on their federal return. Beginning January 1, 2018, these deductions are limited to $10,000 in combined state and local taxes.
7. Student loan debt which is discharged due to death or disability after December 31, 2017 will no longer be taxed as income as it was under old rules. This provision is scheduled to last through 2025.
8. Certain miscellaneous deductions, such as tax preparation expenses, unreimbursed business expenses or investment fees will no longer be deductible in 2018.
9. If you sell a home for a profit, you can exclude from income up to $250,000 individually or $500,000 if married filing jointly. This exclusion is still in place, however the rules for qualifying for it have changed. Previously, the exclusion could be applied if the house was your primary residence and you lived there for at least two of the five years before the sale. Effective January 1, 2018, you have to have lived in the home for at least five of the eight years before the sale in order to qualify.
10. And, of course, tax brackets have changed across the board. See below for new rates (taken from IRB 2018-10).
There are some additional changes which will take effect in 2019, including the elimination of the penalty for failing to obtain health insurance and removing spousal maintenance (aka alimony) as a deduction for the party paying the support and as income for the party receiving the support.
Brian M. Jacques is an attorney licensed to practice in state and federal courts in Kansas. His practice focuses primarily on Business and Commercial Law, Estate Planning and Probate, and tax law. If you have questions about the 2018 changes or would like some assistance preparing your 2018 income tax return, call Brian at 785-357-6311.
The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information and materials provided may not apply to any specific factual and/or legal set of circumstances. No attorney-client relationship is formed nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.