The Tax Cuts and Jobs Act, signed into law Dec. 22, will be the most significant change to the tax code in 30 years.
Most provisions that affect individuals will take effect in 2018 and sunset in 2026, if not extended. The majority of taxpayers will see a decrease in their 2018 taxes, and some of the relief will be reflected in February paychecks, when new IRS withholding guidelines should go into effect.
Here are some of the most significant changes impacting your taxes:
- Tax rates: The law includes an across-the-board cut in tax rates and adjustments to the associated income levels for each bracket.
- Standard deduction: In 2018, the standard deduction will increase from $6,350 to $12,000 for individuals; from $9,300 to $18,000 for heads of households; and from $12,700 to $24,000 for married taxpayers filing jointly.
- Personal exemption: The personal exemption has been repealed.
- Child tax credit: The child tax credit has increased to $2,000 for each qualifying child under 17. This credit applies to single and married taxpayers and is refundable up to $1,400. Tax credits are a dollar-for-dollar decrease in tax liability. Nonrefundable credits are capped at your tax liability, but you can receive the entire refundable credit even if you end up with a negative tax liability.
- Individual health care mandate: The penalty for failure to buy health insurance that provides minimum essential coverage will be repealed after 2018.
- State and local income tax: You will be allowed to deduct up $10,000 per year in state and local taxes or property taxes. Many hoped to save taxes by prepaying their 2018 state income tax, but prepaid taxes will not be allowed as a deduction on your 2017 return.
- Estate tax: The estate tax exemption will double from $5.5 million to $11.2 million in 2018.
- 529 plans: Up to $10,000 in 529 plans can be used to pay for K-12 education.
- Mortgage deduction: You will be allowed to deduct mortgage interest on loans used to buy a new home of up to $750,000 - down from $1 million. Existing mortgages will be grandfathered. Homes that were under contract before Dec. 15 and that close by April 1 still will be eligible for the $1 million. Deductibility of interest on home equity loans has been repealed.
- Medical expense deduction: The threshold for deduction of qualified medical expenses temporarily has been reduced from 10 percent to 7.5 percent of adjustable gross income for 2017 and 2018.
- Alimony: Alimony payments will no longer be deductible by the payor or required to be claimed as income by the payee for divorce and separation agreements executed after Dec. 31, 2018.
Jane Young, a certified financial planner, can be reached at Jane@morethanyourmoney.com.