Some of the impact of the Tax Cuts & Jobs Act will be felt mostly for the 2018 tax year.
President Donald Trump signed the Tax Cuts & Jobs Act into law on December 22nd, and on January 1st, some key details of the Internal Revenue Code will abruptly change.
Changes will be noticeable. On January 1st, the federal estate tax exemption will double; the standard federal income tax deduction will nearly double. The top corporate income tax rate will fall from 35% to 21%. Most business owners who make pass-through income will be able to deduct the first 20% of that income tax-free.
New Individual Tax Brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% (see chart below)
Standard Deduction Will Increase but Personal Exemptions are Eliminated: Standard deduction increases to $12,000 for single filers, $18,000 for head of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law). Personal exemptions ($4K per person) are eliminated. For a single individual, the net result of the increased standard deduction and personal exemption elimination is an additional deduction of $1,500 ($3K for married). Fewer people will end up itemizing deductions under this plan.
Workers may not see changes to their paychecks until February. The Internal Revenue Service will be releasing new withholding tables in January.
Two provisions of the TCJA may also apply retroactively for some taxpayers:
- A larger federal tax deduction for out-of-pocket medical expenses is allowed not just for 2018, but also for 2017. Taxpayers who itemize may write off qualifying medical expenses exceeding 7.5% of income in 2017, instead of 10% of income.
- Businesses that bought new capital equipment after September 27, 2017 will be permitted to fully and immediately expense those purchases for the 2017 tax year.
Health insurance mandate January 1, 2019: On that day, the individual health insurance mandate is scheduled to be repealed; no taxpayer will face a penalty for not having health coverage.
Many of the changes authorized by the passage of the TCJA will expire after 2025. Congress may or may not renew them at the end of that year. The reduction of the corporate tax rate to 21% is a notable exception – that change is permanent.
Mortgage Interest: Limits the mortgage interest deduction to the first $750,000 in acquisition debt. For homes purchased before December 15, 2017, the mortgage deduction limit is grandfathered in at $1M. No limit on rental mortgage interest, considered trade or business. In 2026, this provision reverts to $1M.
Home Equity Debt: Interest paid on home-equity loans will no longer be deductible beginning in 2018, with no grandfathering in. In other words, if you already have a home-equity loan or line of credit, this is the last year you can write off the interest paid on it. In 2026, this provision will revert to current law, which allows a deduction for interest paid on up to $100,000 of home-equity debt.
State and local tax deduction (SALT) $10,000 Max: The bill limits the deductibility of 2018 and future property taxes and state and local income taxes to a combined $10,000.
Child Tax Credit: The child tax credit has doubled to $2,000 for children under 17. The entire credit can be claimed by single parents who make up to $200,000, and married couples who make up to $400,000.
New tax credit for non-child dependents, like elderly parents: Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.
Alimony Payments: Alimony payments 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.
Moving Expense Deduction: Eliminated, except for members of the military.
Unreimbursed Business Expenses, Investment Expenses, CPA Fees, & All 2% Itemized Deductions: Deductions are eliminated starting in 2018, but this reverts to current law in 2026. Business expenses related to a trade or business are still deductible, but unreimbursed expenses related to a W2 position are no longer deductible.
20% Deduction for Pass-Through Businesses: A new 20% deduction is available to all pass-through businesses (S-Corps, partnerships, Schedule C (sole proprietorship), Schedule E (rentals), and Schedule F (farming, trusts, and estates) for 2017 through 2025. Tax law limits the 20% deduction to no more than 20% of the taxpayer’s taxable income subject to ordinary income tax rates.
This is a good time to plan your 2018 tax strategy. Talk to your tax preparer soon, to see how you might take advantage of the adjustments to federal tax law.