Tax Reform 101
The Tax Cuts and Jobs Act of 2017 officially starts affecting tax returns this year, so your taxes next January will look a bit (or a lot) different. Let’s walk through some of the most significant changes to the tax law, so you know what to expect.
The tax brackets have gotten a facelift. The tax rate for the 10% bracket and the 35% stayed the same, but the income amounts for both were raised. A raised income amount in a tax bracket means that you can earn more money before moving up to a higher tax rate.
In the other 5 brackets, the tax rate was lowered, and the income amounts were adjusted. In general, it means more income will be taxed at lower rates, so virtually everyone will be subject to lower taxes in 2018. You can compare and contrast tax brackets in the tables below.
2017 Tax brackets
2018 Tax brackets
New Standard Deduction Amounts and the Personal Exemption
Until the new tax bill, you would get a personal exemption for yourself, your spouse and each dependent in your household. The personal exemption amount, $4,050 per person in 2017, would reduce your taxable income. The personal exemption has been repealed in favor of raising the standard deduction, which also reduces your taxable income but only applies to each filer, not each person in the household.
Taxpayers can still itemize deductions, but many won’t have enough individual deductions to merit itemizing. This is also because all itemized deductions have been repealed except state and local income taxes (capped at $10,000), mortgage interest, medical expenses, disaster losses (attributable to a federally declared disaster), charitable contributions (up to 60% of income), and other deductions not subject to the 2% floor. Deductions for unreimbursed employee expenses, tax preparation fees and safety deposit boxes have been eliminated.
Here are the new standard deduction amounts for each filing status:
Child Tax Credit
Taxpayers with kids, or any qualifying dependents, will get a boost from the new Child Tax Credit (CTC) rates. The credit amount per child is doubling from $1,000 to $2,000, and $1,400 of that amount will be refundable (meaning that, if your tax liability is reduced to zero, you could still get up to $1,400 in refund money). Plus, qualifying dependents who are not children now qualify for a temporary $500 nonrefundable credit.
But there are phaseouts for the Child Tax Credit: married taxpayers filing jointly with an AGI greater than $400,000 and all other taxpayers with an AGI greater than $200,000 will not qualify for the credit.
Affordable Care Act
The penalty on individuals for failing to maintain minimum essential health coverage was repealed, but does not take effect until 2019. The penalty, or shared responsibility payment, still applies for 2018.