If you are like many Americans, you are entering this tax season with more than a little trepidation. The December 2017 Tax Cuts and Jobs Act introduced sweeping revisions to the tax code—changes that are being enforced for the first time with the 2018 tax year.
Touted as a money-saver, Trump tax reform will mean just that for some families. For others, not so much. In fact, some taxpayers will pay more than last year. To avoid an unpleasant Tax Day surprise, it’s important first to understand the basics of the new legislation.
Like any other government legislation, the TCJA is lengthy and somewhat unwieldy at 1,097 pages. Still, its ultimate aim is a simplification of the tax code, and most tax specialists point to two significant changes that should prove to be the most impactful for most Americans:
- Modified tax brackets benefit both higher and lower income groups while offering little if any change to upper-middle-class filers. Five of the seven brackets feature lower tax rates for 2018, with a broader range of income levels within each group. A married couple filing jointly, for example, that earns a combined income of $164,000 is now taxed at the rate of 22 percent, a drop of 6 points from the 2017 tax rate.
- Standard exemptions for deductions have nearly doubled. Whereas the limit for a married couple was $12,700 in 2017, the TCJA raises that threshold to $24,000. Single filers now can opt for a standard deduction of $12,000, up nearly $6,000.
Streamlining the Process
Some experts predict that 90 percent of Americans will opt for standard deductions, thus drastically streamlining the tax preparation process. The IRS also forecasts a significant drop in compliance costs—as Americans that choose the standard deductions no longer need to provide itemized proof.
Whereas deductions reduce the amount of taxable income, tax credits are subtracted from the final tax liability. With qualified child tax credits doubling from $1,000 to $2,000 per child, married couples and heads of households can sharply reduce their tax payments. What’s more, a new tax credit of $500 for non-child dependents is targeted at the rising number of families who support aging relatives requiring care.
Likewise, another significant change is earmarked for the highest end of the tax spectrum. Estate tax-free exemptions have more than doubled, from $5.49 million to $11.18 million.
TCJA Taketh Away
Not everyone is expected to benefit from Trump tax reform. Personal exemptions—in which filers could claim $4,050 for themselves, their spouse and any eligible dependent—have been eliminated, a negative return for those with large families. Other popular deductions that have been changed, capped or abolished include:
- Interest on home equity lines is no longer an allowed deduction unless the money loaned was used to “buy, build or significantly improve your main home or secondary home.”
- Itemized deductions for employee business expenses, work-related education costs or moving expenses are no longer allowed in most cases.
- Expenses due to natural disaster not covered by insurance also cannot be claimed as an exemption—unless the taxpayer lives in what has been deemed a federal disaster area.
- State and local tax deductions are now capped at $10,000.
Depending on your circumstances, the TCJA may prove a time-saving measure that in the end will save your family money on April 15th. Only time—and a tax season or two—will tell.