Whether you like the tax reform bill or not, the fact remains that we all have to abide by the new tax code Congress and the Trump Administration recently enacted. The following are the tax number which will be in effect beginning January 1, 2018 for your taxes to be filed by April 15, 2019.
Below are the major changes to the tax code which will impact the majority of taxpayers. Focus is placed on taxpayers who file Married Filing Jointly and Single taxpayer status.
Income Tax Brackets
The most important update for many Americans is the tax brackets; the changes to the income ranges for the marginal tax rates as well as changes in most of the marginal rates.
The image shows the 2018 tax brackets which you will use to calculate your taxes to be filed in 2019. Every tax bracket got a little bump up in size, allowing more of your money to be taxed at lower rates.
Understanding the tax brackets will help you to estimate your potential tax liability next year. Armed with your estimated taxes, you then have until December 2018 to make charitable contributions, invest for retirement, or do other things which can help manage and lower your tax liability.
Also included in the table is the actual income taxes you will owe based on your income level. The table provides the two most common filing statuses: Married Filing Jointly, and Single Individuals.
Deductions & Exemptions
In addition to the tax rates, the IRS upped many of the deductions and exemptions taxpayers can use to lower their taxable income calculation, and therefore their taxes. Below are some of the most common deductions and exemptions taxpayers can take.
Standard Deduction
- $24,000 – Married filing jointly and surviving spouses (nearly doubled)
- $12,000 – Unmarried individuals (nearly doubled)
The standard deduction got a huge boost, which will have a positive impact for taxpayers who don't itemize deductions. The standard deduction is an amount every taxpayer is allowed take as a deduction from their income to reduce their taxable income.
The standard deduction is used by individuals and families who do not itemize or who have itemized deductions less than or near the standard deduction. The purpose of the boost was to eliminate the need for itemizing deductions, by making the standard deduction larger than itemized deductions for all but high-income taxpayers.
Personal Exemption
- $0 – Personal Exemption (eliminated)
- Compensated by a boost to the Child Tax Credit
The Personal Exemption was repealed with the new tax law, which offsets some of the benefit of the boosted Standard Deduction. Taxpayers without children will only see a two to three thousand dollar boost in the deduction they would have otherwise received. Taxpayers with children, however, will receive a big bonus through the Child Tax Credit.
For example, a married couple under the old law would have received a $13,000 Standard Deduction plus two $4,150 Personal Exemptions for a total reduction of taxable income of $21,300. Now the married couple will receive just a Standard Deduction of $24,000. Still an improvement, but not quite the doubling touted by those in favor of the reform.
Child Tax Credit
- $2,000 - Child Tax Credit (doubled)
- $1,400 - Refundable Portion (new)
- $400,000 - Income Level Phase Out (significant increase)
- $200,000 - Single Filer Phase Out
For families with children, one of the biggest benefits of the 2017 tax reform bill is the huge boost to the Child Tax Credit. Tax credits are more valuable to taxpayers because they reduce your taxes dollar-for-dollar, while tax deductions reduce it only by your marginal tax rate. As a result, all but high-income families will receive a full $2,000 tax break for each child they have.
Additionally, $1,400 of the tax credit is now refundable, meaning low-income families can receive a $1,400 refund of taxes they never paid for each child in the home. This provision effectively provides an additional $1,400 in federal welfare aid per child to poor families.
Itemized Deductions
- $10,000 - Cumulative Cap for Deductions of State Taxes (new)
- $750,000 - Maximum Loan Amount for which Mortgage Interest can be Deducted (down from $1,000,000)
- 7.5% - Income Threshold for Deducting Medical Expenses (down from 10%)
Itemized Deductions have been gutted in the tax reform bill, which will also help to push more taxpayers to take the standard deduction. Most Schedule A deductions have been removed, which will raise the tax liability on higher-income taxpayers and others who have itemized deductions well above the standard deduction. The charitable deduction has stayed in place, which is a great relief for non-profit organizations.
The deduction for Medical Expenses has been expanded, making it easier for families who suffer a major medical catastrophe to get tax relief. In 2016, you could only deduct medical expenses which were greater than 10% of your AGI. For 2017 and 2018 taxes, you can deduct medical expenses once they are greater than 7.5% of your AGI. While this might not seem like a bit deal, a family earning $80,000 a year with $10,000 in medical expenses would see their tax deduction double from $2,000 to $4,000.
Mortgage Interest also remains deductible, although the amount you can deduct has decreased. Prior to the Tax Cuts and Jobs Act, interest on a million dollar mortgage could be deducted. Now, however, you can only deduct interest on the first $750,000 of your mortgage. For the average household, this won't make a bit of difference.
But for higher income and higher net worth households, they will see a pretty significant haircut on their Mortgage Interest deduction. Assume you have a mortgage balance of a million dollars at a 4% interest rate. Your tax deduction would drop from about $40,000 to $30,000.
State Taxes paid are still deductible, but only up to $10,000. The cap is cumulative, meaning if you have $5,000 in property taxes, you could only deduct another $5,000 in state income taxes. For most taxpayers, this will have little impact on their taxes as state taxes are often below the $10,000 threshold. If you live in a high-tax state, such as New York or California, or if you are a higher-income household, the cap could impact you significantly.
Estate Tax Exemption
- $11,200,000 – The amount a person can pass on to their heirs which is exempt from estate taxes (doubled)
- $22,400,000 - Amount a married couple can pass with portability.
The estate tax is effectively a tax on dying, where the Federal Government takes up to 39.6% of the value of the estate. Fortunately, an estate tax credit creates an amount you can pass on to your heirs without being taxed. The estate tax exemption has doubled under the new tax law, making estate planning for tax purposes unnecessary for all but the ultra-high net worth taxpayer. You will still need estate planning for other purposes, however, including caring for minor children, passing assets to whom you wish, charitable giving, and medical planning.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax was a big part of the national debate about tax reform. While the Trump administration wanted to repeal it, the AMT survived the tax overhaul.Some tweaks, however,will reduce the burden the AMT can place on middle-class taxpayers.
The AMT has unfortunately become the bane of the middle class. Originally created to tax ultra-high income individuals a minimum amount, for over 40 years it wasn't indexed for inflation. As a result, the tax now effects millions of Americans who definitely don't qualify as ultra-high income. The AMT offers fewer deductions, increasing the taxes owed by individuals. (It hit my wife and I last year).
Exemption Amounts
- $109,400 – Married or Surviving Spouses (36% increase)
- $70,300 – Unmarried Individuals (27% increase)
The AMT offers a much higher exemption than the traditional tax code, which is designed to avoid middle-class taxpayers from being hit by the AMT. Up until 2012, this exemption amount was not indexed for inflation, meaning middle-class households have ended up being a majority of the AMT taxpayers. The tax reform bill increases the exemption amount by a significant margin, which will help to reduce the number of middle-class people who are caught up in AMT.
Exemption Phaseouts Begin
- $1,000,000 – Married or Surviving Spouses (massive increase)
- $500,000 – Unmarried Individuals (massive increase)
Another aspect of the AMT which causes it to hit middle-class households is the exemption phaseout. Again, as it wasn't indexed for inflation in the past, the phaseout begins squarely in the middle-class. The phase-outs have increased dramatically, making it so no one but the highest income earners will lose their exemption.If your income is over the above amounts, you'll begin losing your exemption, which will increase your AMT tax faster.
