There were many changes in the tax laws which will be effective in the year 2018, for tax returns due April 15th, 2019. Most of these changes will not affect your income tax returns that are due April 15th, 2018. There are some exceptions listed at the end of this article.
Changes for Individuals
Lowers individual rates – The bill preserves seven tax brackets, but changes the rates, here is how much income would apply to the new rates.
Nearly doubles the standard deduction – For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700.
Eliminates personal exemptions – Today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Doing so lowers your taxable income and thus your tax burden. The GOP tax plan eliminates that option. For families with three or more kids, that could mute if not negate any tax relief they might get as a result of other provisions in the bill.
Caps state and local tax deduction – The final bill preserves the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Preserving the break — albeit with a cap — is likely to provide more help to higher income households in high-tax states.
Expands child tax credit – The credit doubled to $2,000 for children under 17 for the tax year 2018. It also would be made available to high earners because the bill raised the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.
Creates temporary credit for non-child dependents – The bill would allow parents to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
Lowers cap on mortgage interest deduction – If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
Curbs who’s hit by AMT – Earlier bills called for the elimination of the Alternative Minimum Tax. The final version keeps it, but reduces the number of filers who would be hit by it by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
Preserves smaller but popular tax breaks – Earlier versions of the bill had proposed repealing the deductions for medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. They also would have repealed the tax-free status of tuition waivers for graduate students. The final bill, however, preserves all of these as they are under the current code. And it actually expands the medical expense deduction for 2018 and 2019.
Eliminates mandate to buy health insurance – The individual mandate on health insurance has been scrapped. The elimination of the individual mandate, which penalizes people who do not have health care, goes into effect in 2019.
What you can still deduct
Student Loan Interest – The deduction for student loan interest, which is up to $2,500 per year, is safe.
Medical Expenses – The deduction for medical expenses wasn’t cut. In fact, it’s been expanded for two years. In that time, filers can deduct medical expenses that add up to more than 7.5% of adjusted gross income. In the past, the threshold for most Americans was 10% of adjusted gross income.
Classroom supplies – The deduction for teachers who spend their own money on school supplies was left alone. Educators can continue to deduct up to $250 to offset what they spend on classroom materials.
Electric Vehicle Tax Credit – Drivers of plug-in electric vehicles can still claim a credit of up to $7,500. Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.
Deductions that are gone
Tax deduction for alimony payments – Alimony payments, which are codified in divorce agreements and go to the ex-spouse who earns less money, are no longer deductible for the person who writes the checks. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018.
Moving expenses – There may be some exceptions for members of the military. But most people will no longer be able to deduct the cost of their U-Haul when they move for work.
The disaster deduction – Losses sustained due to a fire, storm, shipwreck or theft that aren’t covered by insurance used to be deductible, assuming they exceeded 10% of adjusted gross income. But now through 2025, people can only claim that deduction if they’ve been affected by an official national disaster. That would make someone whose house was destroyed by a California wildfire potentially eligible for some relief, while disqualifying the victim of a random house fire.
Changes for Business
The corporate tax rate is coming down – The corporate tax rate has been cut from 35% to 21% starting next year. The alternative minimum tax for corporations has been thrown out altogether.
Per the above scenario , a business owner whose taxable income is $600,000 or greater would receive $70.40 if his/her Company is an Pass-through Company (S Corp, LLC), compared to $60.20 if his/her Company was a C Corporation. Per the above scenario, the C Corp owner will pay more taxes. This scenario does not apply to Service Businesses like doctors, attorneys, accountants.
Per the above scenario , a business owner with taxable income is $315,000 would receive $80.80 if his/her Company is an Pass-through Company (S Corp, LLC), compared to $64.15 if his/her Company was a C Corporation. Per the above scenario, the C Corp owner will pay more taxes.
Pass-through entities will also get a break – The tax burden by owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — has been lowered via a 20% deduction. The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).
The way multinational corporations are taxed is about to change – The U.S. is switching to a territorial system of taxation, which means companies won’t owe federal taxes on income they make offshore. To help the transition, companies will be required to pay a one-time, low tax rate on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets, like equipment in which profits were invested.
Filing 2017 Taxes
There are only a handful of provisions in the legislation that apply retroactively, so just a small number of taxpayers will do some things differently when they file their 2017 taxes next April.
Taxpayers with high out-of-pocket medical expenses – The medical expenses deduction will be expanded for tax years 2017 and 2018, allowing deductions for expenses that exceed 7.5 percent of income, up from 10 percent. Some will be able to deduct more from their 2017 taxes in April, and some will newly qualify for the deduction.
Businesses that recently purchased equipment – A new provision allowing for full, immediate expensing (as opposed to gradual deductions over time) of capital investments will apply to purchases after September 27, 2017, so some companies will benefit on their 2017 tax returns. Full expensing is allowed for five years before being phased out.