Tax Cuts and Jobs Act and How the Tax Plan May Affect You

New year, new taxes.

President Trump said that he wanted the new tax plan on his desk by Christmas. Nonetheless, the Tax Cuts and Jobs Act went through the Senate, House and flew by Congress. Ultimately, the Tax Cuts and Jobs Act tax plan has a goal to reduce the tax rates for individuals and businesses, which will ultimately affect how much you end up receiving your refund and paying in your tax liability. Most changes will expire in 2025 whereas some will remain permanent.

With the media raving about how taxpayers’ pockets will be affected, here are the changes that the new tax plan will lead to starting January 1st, 2019.

What was eliminated in the new tax plan?

In this new tax plan, many factors have either been subject to change or have been completely removed. The following has a limit or will be completely gone for the tax year 2018:

  • Personal Exemption
  • Electric Vehicle Tax Credit
  • Education-related Deductions (This means that you can no longer deduct any tuition and fees.)
  • Casualty and Theft Loss Deduction (Victims of natural disasters are still eligible.)
  • Alimony Deduction
  • Moving Expenses Deduction (This does not apply to members of the Armed Forces)
  • Unreimbursed Job Expenses Deduction (This means you cannot claim expenses for tools, supplies, uniforms, dues, subscriptions, job search costs, travel, mileage and the Schedule A home office deduction.)
  • Obamacare Mandate
  • Net Operating Loss Carrybacks (Carryforwards have a limit of 80% of your taxable income)
  • Corporate Alternative Minimum Tax
  • Tax Preparation Fees
  • Investment Interest Expenses Deduction
  • Interest on Home Equity Indebtedness Deduction

Here are how the bill plans to execute their changes.

Standard Deduction:
One of the most jarring changes is here. To begin with, the standard deductions are doubled. With this in mind, the current standard deductions are $6,350 for single taxpayers, $12,700 for married filing jointly and, $9,350 for the head of household filing status for your 2017 taxes. It will change to the following:

  • $12,000 for Single
  • $18,000 for Head of Household
  • $24,000 for Married Filing Jointly
  • $12,000 for Married Filing Separately

The bottom line is, because of a higher standard deduction, it will be harder for taxpayers to itemize their deductions.

Tax Brackets:
To begin with, our seven current tax brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The new tax plan changes it to 10%, 12%, 22%, 24%, 32%, 35% and 37%.

  • 10% (Up to $9,525 for individuals; up to $19,050 for married filing jointly; and $13,600 for head of household)
  • 12% (< $9,525 to $38,700; < $19,050 to $77,400 for couples; and < $13,600 to $51,800)
  • 22% (< $38,700 to $82,500; < $77,400 to $165,000 for couples; and < $51,800 to $82,500)
  • 24% (< $82,500 to $157,500; < $165,000 to $315,000 for couples; and < $82,500 to $157,500)
  • 32% (< $157,500 to $200,000; < $315,000 to $400,000 for couples; and < $157,500 to $200,000)
  • 35% (< $200,000 to $500,000; < $400,000 to $600,000 for couples; and < $200,000 to $500,000)  
  • 37% (< $500,000; < $600,000 for couples; and < $500,000)

Child Tax Credit:
The child tax credit increases as well as the income threshold in which it phases out. Due to the Tax Cuts and Jobs Act, the child tax credit increases to $2,000 per child and the first $1,400 will be a refundable tax credit. At the same time, the cut off for the credit increases from $110,000 to $200,000 for single filers and $400,000 for those who file married filing jointly.

State and Local Tax (SALT) Deduction:
The new tax bill limits property, state and local taxes to $10,000.

On a positive note, the Student Loan Interest Deduction and the Lifetime Learning Credit is kept in place. Also, the Graduate Student Tuition Waiver remains tax-free and teachers can still deduct $250 for unreimbursed classroom expenses. For the American Opportunity Credit, a student can claim this credit for 5 years instead of 4 years. But, if you claim the credit on the fifth year, it will change to half the value of the credit applied to the first four years. Additionally, you can use a 529 plan to support K-12 expenses with a distribution cap of $10,000.

Alternative Minimum Tax (AMT):
There are several adjustments to the AMT. The Tax Cuts and Jobs Act eliminates the AMT for corporations and remains for individuals. The exemption amount increases from $54,300 to $70,300 for single filers. Then, for taxpayers who file jointly, their exemption amount increases from $84,500 to $109,400. Overall, the exemptions phase out at $500,000 for individual filers and $1 million for joint filers.

Estate Tax:
The bill keeps the estate tax and doubles the exemption amount for individuals to $11.2 million and couples to a whopping $22.4 million.

Home Mortgage Deduction:
For first time home buyers, they could be eligible for a deduction of their mortgage for $750,000. Due to this, a limit on acquisition indebtedness has been put into place for $750,000 and $375,000 for married taxpayers filing separately. Otherwise, for taxpayers who took out mortgages before December 15 of 2017, their limit is $1,000,000 and $500,000 for married taxpayers filing separately.

Charitable Contributions Deduction:
Surprisingly, for taxpayers who donate, there is now a percentage increase in the limitation to claiming charitable donations on your tax return. In fact, you can now deduct up to 60% of your adjusted gross income in comparison to the current 50%. On the other hand, you cannot deduct any payments that fall under the category of any payments made to colleges or their athletic events for the purpose of tickets and seats in a stadium.

Will this affect my 2017 taxes?

Previously, these changes were going to only affect your 2018 tax return. Despite that, one deduction will affect your 2017 tax return. If you are a taxpayer who depends on itemizing your medical expenses when the new tax year rolls around, the Medical and Dental Expenses Deduction now has a limit of 7.5% or more of their adjusted gross income in comparison to our current 10% limitation. Before, if you had an AGI of $20,000 and $3,000 in medical expenses, you can claim 1,000 as a deduction or your expenses minus your percent limitation of AGI. ($20,000 x 10% = $2,000)

For example, now using the same the numbers, if you have an AGI of $20,000, your limitation of expenses will now be $1,500. Therefore, if you have $3,000 in medical expenses, you can claim $1,500 as a deduction. This deduction will revert back to its 10% limitation in 2019.

Skip the number crunching.

Before worrying about your 2018 return, you can still claim your usual deductions for your 2017 tax return. The tax year 2017 is available on RapidTax so you can start your return and be ready in time for January 29th!

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