During the holiday season, new tax legislation passed by Congress and President Trump made the headlines. The Tax Cuts and Jobs Act of 2017, signed by President Trump on December 22, 2017, is the first major tax overhaul in 30 years. While the new bill will be analyzed, debated, and clarified further throughout the year, you will find that it might affect many areas of your financial life, such as some of your employee benefits or your charitable giving. Your withholding may change beginning in February.
The marriage penalty is mostly gone. The married filing jointly income thresholds are now double the single thresholds for all but the two highest tax brackets—previously, the thresholds were not aligned so precisely. So for most filers, the penalty is gone. The exception now is the two top brackets, in which combined income is greater than $400,000.
THINGS TO KNOW
- While the standard deductions have nearly doubled, the personal exemptions are gone.
- Starting in 2019, the individual mandate of the Affordable Care Act is repealed.
The personal exemption is now gone. This exemption—which would have been $4,150 in 2018—was an additional amount that could be deducted for oneself and, in certain cases, additional times based on the number of a taxpayer’s dependents.
Alimony deduction is no longer deductible by the payer. Alimony will no longer be deductible by the payer, nor will it be includible in the recipient’s income, for divorces and separations signed after December 31, 2018.
The family tax credits increase. The child tax credit doubles from $1,000 to $2,000; $1,400 of this amount is refundable. There is a new $500 credit for other dependents; this credit did not exist previously.
The child and dependent care credits stay put. This credit remains as is—$1,050 for one child under 13 or $2,100 for two children. Dependent care flexible spending accounts can still exempt up to $5,000 of income.
The “kiddie tax” changes a little. Before the new law, a child’s unearned income (such as that from investment portfolios) that was less than $2,100 was taxed at the child’s tax rate, and anything over that was taxed at the parents’ tax rates. Under the new law, the child’s unearned income will be taxed using the brackets used by trusts and estates. However, tax rates on earned income (such as that from a job) do not change.
Casualty loss deduction is now limited. Casualty losses (such as those from fire, flood, burglary, etc.) will be deductible only in a disaster that is declared by the president.
Mortgage interest deduction is reduced. The deduction for newly bought homes and second homes is lowered from $1 million to $750,000. Interest on home equity loans is no longer deductible beginning in 2018 unless the loan money is used for home improvement purposes.
State, local, sales, and property tax deduction is now capped. The new 2018 law caps this deduction at $10,000; previously, it was unlimited.
The interest deduction for home equity loans. This popular deduction, which was previously limited to home equity loans up to $100,000 ($50,000 if you are married and file separately), was removed by the recent tax law, beginning in 2018.
And a few more
The individual mandate and healthcare deductions. Starting in 2019, the individual mandate of the Affordable Care Act (aka Obamacare) is repealed, meaning that there will no longer be a penalty for not having a health insurance plan. That also means the penalty will still be in force throughout 2018, as planned. The out-of-pocket medical expense deduction (which is one of the itemized deductions) drops from 10% to 7.5%, but only for 2017 (retroactively) and 2018, after which it reverts to 10%.
Charitable contribution deduction changes a little. The charitable contribution is a favorite of many taxpayers because it allows them to donate money or items and get a tax deduction for them. Given the near doubling of the standard deductions, however, the tax effects of donating might be moot for you.
The deduction has the following two changes: one, taxpayers can deduct donations of up to 60% of their income instead of last year’s 50%; and donations you make to a college in exchange for the right to buy athletic tickets are no longer deductible.