2018 Tax Highlights

2018 Tax Law Changes (16 Highlights)

1. Higher standard deduction

This one shouldn't come as a surprise, as it was included in both the House and Senate versions of the bill. Beginning with the 2018 tax year, the conference agreement would nearly double the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly.

2. No more personal exemption

Here's the catch: Along with doubling the standard deduction, the bill eliminates the personal exemption, which is currently an additional $4,150 deduction (in 2018) for every taxpayer and dependent. For example, a married couple with two children would get a $11,000 boost to their standard deduction, but would lose $16,600 in personal exemptions. The higher child tax credit, which we'll get to shortly, should help to offset this, but it's still important to notice.

3. Lower marginal tax rates

The final version of the bill didn't do much to simplify the tax code, at least in regards to the tax brackets. We'll still have seven marginal tax brackets, but with generally lower tax rates than the current 2018 tax brackets.

Income Tax Brackets:

The Act keeps the seven income tax brackets but lowers tax rates. Employees will see changes reflected in their withholding in February 2018 paychecks. These rates revert to the 2017 rates in 2026. The Act creates the following chart. Keep in mind that the income levels will rise with inflation. But they will rise more slowly than in the past because the Act uses the chained consumer price index.

Income Tax Rate

Income Levels for Those Filing As:

2017

2018-2025 

Single

Married-Joint

10%

10%

$0-$9,525

$0-$19,050

15%

12%

$9,525-$38,700

$19,050-$77,400

25%

22%

$38,700-$82,500 

$77,400-$165,000

28%

24%

$82,500-$157,500

$165,000-$315,000

33%

32%

$157,500-$200,000 

$315,000-$400,000 

33%-35% 

35%

$200,000-$500,000

$400,000-$600,000

39.6%

37%

$500,000+

$600,000+

4. No more marriage penalty (for middle-class households)

In the chart, notice that for the first five marginal tax brackets, the income ranges for single filers are exactly half of those for married couples. This helps to eliminate the marriage penalty for most households.

5. Higher child tax credit

Increasing the child tax credit has been a major focus not only would the child tax credit be doubled to $2,000, but $1,400 of this would be refundable. Furthermore, the income thresholds where the credit phases out would get far more generous. It allows a $500 credit for each non-child dependent. The credit helps families caring for elderly parents.

6. The SALT deduction stays

The deduction for state and local taxes, also known as the SALT deduction, is the largest tax deduction under current law, in terms of dollar volume.  However, the SALT deduction remains, just with a $10,000 cap that applies to a taxpayer's combined state and local property and income taxes.  This will definitely impact most higher tax states and higher income families.

7. The medical expense deduction would get larger

Not only would the medical expense deduction kick in at 7.5% of AGI for all taxpayers, as opposed to 10% currently, but this change would be retroactive to the 2017 tax year.

8. Mortgage interest is still deductible, with a lower cap

The mortgage interest deduction remains, but will now apply to as much as $750,000 in mortgage principal, down from $1 million under current law. However, existing mortgages are grandfathered in.

9. Many deductions are going away

Some other deductions remain, such as the itemized deduction for charitable contributions and the above-the-line deductions for student loan interest and educator classroom expenses.  However, many deductions are eliminated under the bill. Everything that falls under the category of "miscellaneous itemized deductions" is going away. This includes things like unreimbursed employee expenses and tax preparation costs.

10. No more individual mandate for 2019

The Tax Cuts and Jobs Act will get rid of the individual mandate -- that is, the law that says that everyone needs to buy health insurance or pay a penalty in 2019.  The law remains in 2017 and 2018.

11. 529 plans will be more flexible

The conference agreement expanded the acceptable use of 529 college savings plans to include as much as $10,000 per year for secondary and/or elementary school expenses (including home-school costs). Currently, funds in these plans are only available for post-secondary expenses.

12. Higher AMT exemptions

The alternative minimum tax, or AMT, would remain under the Act. However, the exemptions will be increased significantly in order to make the tax better serve its intended function -- ensure that the wealthy pay at least a minimum amount of tax, not potentially raise taxes on middle-class Americans.

It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to pre-Act levels in 2026.  

13. Higher estate tax exemption

The bill doubles the lifetime exemption amount to $11.2 million per individual ($22.4 million per married couple), which will make the 40% tax apply to even fewer houses than it does now.

14. These aren't permanent changes

As a final point, most of the provisions in the bill expire at the end of 2025.  Congress could certainly choose to extend them before they run out, but it's important to be aware that these aren't permanent tax changes.

Matthew Frankel, (TMFMathGuy), Dec 18, 2017 at 6:23PM

15. Business Taxes

The Act lowers the maximum corporate tax rate from 35% to 21%, the lowest since 1939.

It creates a standard deduction of 20% for pass-through businesses. This deduction ends after 2025. The deductions are limited once the income reaches $157,500 for singles and $315,000 for joint filers. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. Small business owners should delay any income they can until 2018 to maximize that deduction.

It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

It advocates a change from the current "worldwide" tax system to a “territorial” system. Under the worldwide system, multinationals are taxed on foreign income earned. They don't pay the tax until they bring the profits home. As a result, many corporations leave it parked overseas. Under the territorial system, they aren't taxed on that foreign profit. They would be more likely to reinvest it in the United States. The Act allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.

It retains tax credits for electric vehicles and wind farms. 

16.  Alimony changes in 2018 and 2019.

For NEW alimony, those paying alimony can no longer deduct it while those receiving it will no longer include it in income.  This change begins in 2019 for divorces signed in 2018.

by Kimberly Amadeo, Updated December 22, 2017



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