The Tax Cuts and Jobs Act that passed Congress on December 20 is the biggest change to our nation’s tax code in more than 30 years. This tax reform legislation will have an impact on almost every individual, family and business in the U.S.
According to the Tax Policy Center, 90 percent of middle-class Americans will receive a tax cut averaging $1,600 a year. It’s expected that withholding formulas will be recalculated by February, at which time many workers will start to see larger take-home pay.
In this article, we will recap the major provisions of the Tax Cuts and Jobs Act that affect individuals and families. In our next article, we’ll recap the major provisions that affect businesses.
Tax Brackets Retained, Rates Drop
The tax reform act retained the seven individual tax brackets but adjusts the rates as follows:
Pre-reform rate Post-reform rate
In addition, the act nearly doubles the standard deduction as follows:
- Married couples filing jointly: from $12,700 to $24,000
- Heads of household: from $9,350 to $18,000
- Singles and married couples filing separately: from $6,350 to $12,000
However, the personal exemption of $4,050 for individuals, spouses and dependents is being suspended. The increased standard deduction could compensate for the suspended personal exemptions, depending on your particular tax situation. Also, it’s expected that fewer people will itemize deductions due to the higher standard deductions, which would simplify tax filing for them.
Child Tax Credit Expanded
Tax reform also doubles the child tax credit and raises the income phase-out level for claiming it. The credit is being increased from $1,000 to $2,000, with $1,400 of this being refundable. Meanwhile, the phase-out level is being raised from a starting point of $110,000 to $400,000 for married couples, and from a starting point of $75,000 to $200,000 for non-married households. As a result, more Americans will be able to claim the child tax credit.
All of these changes will become effective for tax years beginning after December 31, 2017. However, they are only effective through the end of 2025 — or in other words, they aren’t permanent.
More Beneficial Changes
The tax reform act also makes other changes that will be beneficial for many individuals and families. For example, the adjusted gross income (AGI) threshold for deducting medical expenses is reduced from 10% to 7.5% for 2017 and 2018. The alternative minimum tax (AMT) exemption is increased to $109,400 for married couples filing jointly, $70,300 for singles and heads of household, and $54,700 for married couples filing separately.
Distributions from Section 529 education savings plans can now be used to pay for qualifying elementary and secondary school expenses. And the estate tax exemption is increased from $5.6 million to an estimated $11.2 million per person in 2018. This will enable more wealthy families to leave assets to their heirs free of estate tax burdens.
Offsetting the Impact
To help offset the impact of these provisions on federal revenue, the tax reform act eliminates or reduces some popular tax deductions. These include deductions for moving expenses, interest on home equity loans, personal casualty and theft losses, and alimony for divorce agreements signed after 2018.
Also, the deduction for state and local taxes will be capped at $10,000. This is the aggregate amount for state and local property taxes and either sales or income taxes. And interest can only be deducted on mortgage debt of up to $750,000, down from $1 million before tax reform, for homes purchased between 2018 and 2025. The mortgage interest deduction limit remains $1 million for mortgage debt incurred before December 15, 2017.
Seek Professional Guidance
The provisions and potential impacts of Tax Cuts and Jobs Act go well beyond those discussed here. Therefore, be sure to consult with a tax professional for more details on how the legislation could affect you and your family.