At the end of 2017, The Tax Cut and Jobs Act was passed by Congress and signed by President Trump. It’s full of compromises and tax law changes – ending up substantially different from the earlier House and Senate bills you may have heard about along the way.
Experts saw many of these tax law changes coming, while others were curveballs. Today, we’re breaking down four of the major tax law changes and reminding you of a few key elements that are staying the same.
Tax Law Changes for 2018
1. Changes To Your Tax Brackets
From 2018 through 2025, the tax law changes will keep seven tax brackets in place, but six are at lower rates. Keep in mind that most of the changes to individual taxes made by the bill are temporary — they’re set to expire after the 2025 tax year.
During this time, you might benefit from these new rates – unless you’re currently in the 33% marginal tax bracket. In that case, you’ll get bumped into the 35% marginal bracket in 2018. (This shift mostly affects singles and heads of households with taxable income between $200,000 and $400,000.)
The temporary rate brackets that come with the 2018 tax law changes are:
2. Itemized Deductions
The previous tax bill let you itemize deductions to the extent that they exceeded 2% of your adjusted gross income, including tax preparation fees, investment management and consulting fees, employee expenses that weren’t reimbursed, some kinds of hobby expenses, and more.
Now with the 2018 tax law changes, all of those itemized deductions that were subject to the 2% floor are eliminated until at least 2025.
Keep in mind that contributions you make to charities are still allowed as an itemized deduction, but the tax law changes increased the limit on cash contributions to public charities from 50% to 60% of AGI after Dec. 31, 2017 and before Jan. 1, 2026. If you normally plan on getting a deduction for your charitable gifts, it’s now more difficult to hit the itemized deduction threshold and receive the tax benefit.
The widely-used medical expense deduction is still around even with the tax law changes, to the extent the expenses exceed 7.5% of your AGI for years 2017 and 2018. Beginning in 2019 and continuing through 2025, the AGI limitation increases to 10%.
If you itemized in the past, you might be better off with the increased standard deduction now. This makes tax filing a little simpler, but it can also affect financial decisions regarding where you live, timing of charitable gifts, how expensive a home to buy, and whether to pay down your mortgage.
(Always consult with your accountant to figure out what’s best for your situation.)
3. Higher Standard Deductions
Starting in 2018, the tax law changes almost double the standard deduction amounts. Although personal and dependent exemption deductions, which would have been $4,150 each for 2018, have been eliminated.
These tax law changes will be great news for some taxpayers and a setback for others, especially those with dependents.
The 2018 standard deduction amounts are as follows:
- $12,000 for singles (up from $6,350 for 2017)
- $24,000 for joint-filing married couples (up from $12,700)
- $18,000 for heads of households (up from $9,350)
4. Mortgage Interest Deductions
The tax law changes still include the mortgage interest deduction – with a few small changes.
The tax bill restricts the mortgage interest deduction to interest on the first $750,000 of home-acquisition debt incurred after December 15, 2017. This is a decrease from the previous $1 million limit.
For debt you’ve taken on before December 15, 2017, the $1 million limit stays in place. You’re also no longer able to deduct new or existing interest on home equity lines of credit.
Provisions That Will Remain The Same:
1. The capital gain exclusion from the sale of your primary residence is staying intact. You’re still eligible to take the $250,000 capital gains exclusion from the sale of your home as a single taxpayer, and $500,000 as a married taxpayer filing jointly. For this to apply to you, you’ll need to occupy your home as your principal residence for two out of the past five years.
2. The widely-used student loan interest deduction is still allowed in 2018. You’ll be able to deduct up to $2,500 per year.
3. Tax rates on long-term capital gains and qualified dividends will stay the same. This means there’s a maximum rate of 15% for single taxpayers with taxable income over $425,800 and married taxpayers filing jointly with income over $479,000.
4. Investors will still be able to choose the most appropriate tax lot to use for investment sales’ cost basis.
When it comes how the 2018 tax law changes affect you and your family, you’ll likely find there is good news mixed in with some not-so-good news. Be sure to always consult with a knowledgeable tax professional about the best course of action for you throughout the rest of the year and beyond!
*Disclaimer: Citywide Home Loans does not provide tax services, financial planning services or any other service apart from lending. You should always consult with your legal, tax and financial advisors to determine which strategy is the most suitable for your specific circumstances.