Taxes are always confusing. Hopefully this will give you some insight on how the tax law changes for 2018 affect you.
Key items
- The tax law increased standard deductions but limited or eliminated many other popular deductions.
- The tax bracket income limits and rates were adjusted.
- Far fewer people will claim itemized deductions in the future.
The Tax Cuts and Jobs Act enacted in late 2017 was more than 500 pages long, with detailed changes affecting everything from the taxation of trusts to the treatment of life insurance policy acquisition costs. But for most taxpayers, the biggest changes have to do with the new income tax rates, a higher standard deduction, and new limits on many popular deductions.
Here is a quick overview of the changes and details on how they may affect your taxes.
Standard versus itemized deductions
A major change from tax reform was a sharp increase in the standard deduction. For tax years 2018 through 2025, the standard deduction will be $12,000 for single filers and $24,000 for married couples filing jointly. That’s close to double the levels in 2017. The law also slightly increases the higher standard deduction for the elderly, the blind, and persons with a disability. But it eliminates the $4,050 personal exemption (see table below).
| 2017 | 2018–2025 | ||
|---|---|---|---|
| Standard deductions | Single | $6,350 | $12,000 |
| Married filing jointly (MFJ) | $12,700 | $24,000 | |
| Elderly or blind (single and not a surviving spouse) | Additional $1,550 | Additional $1,600 | |
| Elderly (both over age 65 and MFJ) | Additional $2,500 | Additional $2,600 | |
| Exemption | Personal exemption | $4,050 per family member | Eliminated |
Changes to deductions and credits
During the debate about tax reform, lots of changes were proposed. Some didn’t make the final bill and remain unchanged—including capital gains rules for the sale of a primary residence, deductions for student loan interest, treatment of tuition waivers, adoption assistance, investment interest, teachers’ out-of-pocket expenses, and the credit for electric car purchases.
A number of important retirement savings incentives were unchanged as well, including deductions for 401(k)s, traditional IRAs, and health savings accounts (HSAs).
On the other hand, there were a wide range of other deductions and credits that were changed, added, or eliminated, including:
| 2017 | 2018–2025 | |
|---|---|---|
| Dependent credit (other than child) | N/A | $500 credit per qualifying dependent |
| Child/dependent tax credit | $1,000 credit per qualifying child < age 17 (modified adjusted gross income [MAGI] limit $110,000 MFJ/$75,000 single) | $2,000 credit per qualifying child < age 17 (MAGI limit $400,000 MFJ/$200,000 single) |
| Moving expenses | Deductible (move >50 miles for a new job) | Eliminated |
| State and local taxes | Deductible (property and sales or income tax) | Capped at $10,000 of expenses (property and sales or income tax, regardless of filing status) |
| Mortgage interest | Limited to interest on $1,000,000 of debt on primary or secondary home | Limited to interest on $750,000 of debt on primary or secondary home (no change for existing mortgages) |
| Home equity loan interest deduction | Limited to interest on $100,000 of debt | Eliminated (does not apply to home equity loans for substantial home improvements that comply with debt limit) |
| Medical expense deduction | Deductible if >7.5% of AGI | No change for 2018 >10% of AGI 2019–2025 |
| Casualty and theft | Deductible if >10% of AGI | Eliminated (except in the case of federally recognized natural disaster) |
| Alimony | Deductible by the payer; taxable to the payee |
The deduction for the payer is eliminated; the recipient is no longer taxed |
| Investment interest expense | Deductible up to the amount of net investment income | Unchanged |
| Miscellaneous expenses, including:
Tax prep fees, Investment advisory fees, Unreimbursed work expenses (travel, parking, meals, and entertaining), Depreciation on phone or computer required for work, Investment expenses |
Deductible in excess of 2% of AGI | Eliminated |
| Charitable gifts of cash | Limited to 50% of AGI | Raised to 60% of AGI |
Other major changes
The tax reform law included a number of other major changes for individual taxpayers. For one, the new law eliminates the Pease phaseout on itemized deductions for taxpayers with high AGIs from 2018 to 2025. In addition, the law made changes to the alternative minimum tax (AMT) and was designed to reduce the number of taxpayers forced to pay using that system.
The law also created a new opportunity for education funding, allowing taxpayers to use 529 accounts to fund up to $10,000 of K–12 qualified tuition expenses per student each year, in addition to the existing uses for higher education.
| 2017 | 2018–2025 | |
|---|---|---|
| AMT exemption, single | $54,300 exemption | $70,300 exemption |
| AMT exemption, MFJ | $84,500 exemption | $109,400 exemption |
| Pease itemized deduction phaseout, single | Started at $261,500 | Eliminated |
| Pease itemized deduction phaseout, MFJ | Started at $313,800 | Eliminated |
| 529 education savings | Qualified higher education expenses | Expanded to include up to $10,000 in K–12 tuition per beneficiary per year |
| Self Employed Income Reduction | Not available in 2017 |
Under the new laws, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship. Keywords: Up to. Individuals earning $157,500 and married couples earning $315,000 are eligible for the fullest deduction. This is in regard to to the amount you pay income tax on. You will still pay self-employment taxes on your net income from your business. |
New tax rates
Tax reform also reset the tax brackets, setting new income thresholds and tax rates, while retaining the total number of 7 brackets. It’s worth remembering that the tax code is progressive, so your marginal tax rate is the top tax rate you pay—the rate you would pay on an additional dollar of income. But you will generally pay taxes at a variety of rates, depending on your taxable income. So looking at the chart below, a single filer with $85,000 in income would pay taxes at the 10% rate on the first $9,525, pay 12% on the income from $9,526 to $38,700, pay 22% on additional income up to $82,500, and have a marginal tax rate of 24%.
Single
| Taxable Income | Tax Rate |
| $0 – $9,525 | 10% of taxable income |
| $9,526 – $38,700 | $952.50 plus 12% of the amount over $9,525 |
| $38,701 – $82,500 | $4,453.50 plus 22% of the amount over $38,700 |
| $82,501 – $157,500 | $14,089.50 plus 24% of the amount over $82,500 |
| $157,501 – $200,000 | $32,089.50 plus 32% of the amount over $157,500 |
| $200,001 – $500,000 | $45,689.50 plus 35% of the amount over $200,000 |
| $500,001 or more | $150,689.50 plus 37% of the amount over $500,000 |
Married Filing Jointly or Qualifying Widow(er)
| Taxable Income | Tax Rate |
| $0 – $19,050 | 10% of taxable income |
| $19,051 – $77,400 | $1,905 plus 12% of the amount over $19,050 |
| $77,401 – $165,000 | $8,907 plus 22% of the amount over $77,400 |
| $165,001 – $315,000 | $28,179 plus 24% of the amount over $165,000 |
| $315,001 – $400,000 | $64,179 plus 32% of the amount over $315,000 |
| $400,001 – $600,000 | $91,379 plus 35% of the amount over $400,000 |
| $600,001 or more | $161,379 plus 37% of the amount over $600,000 |
Married Filing Separately
| Taxable Income | Tax Rate |
| $0 – $9,525 | 10% of taxable income |
| $9,526 – $38,700 | $952.50 plus 12% of the amount over $9,525 |
| $38,701 – $82,500 | $4,453.50 plus 22% of the amount over $38,700 |
| $82,501 – $157,500 | $14,089.50 plus 24% of the amount over $82,500 |
| $157,501 – $200,000 | $32,089.50 plus 32% of the amount over $157,500 |
| $200,001 – $300,000 | $45,689.50 plus 35% of the amount over $200,000 |
| $300,001 or more | $80,689.50 plus 37% of the amount over $300,000 |
Head of Household
| Taxable Income | Tax Rate |
| $0 – $13,600 | 10% of taxable income |
| $13,601 – $51,800 | $1,360 plus 12% of the amount over $13,600 |
| $51,801 – $82,500 | $5,944 plus 22% of the amount over $51,800 |
| $82,501 – $157,500 | $12,698 plus 24% of the amount over $82,500 |
| $157,501 – $200,000 | $30,698 plus 32% of the amount over $157,500 |
| $200,001 – $500,000 | $44,298 plus 35% of the amount over $200,000 |
| $500,001 or more | $149,298 plus 37% of the amount over $500,000 |