Highlights of the 2017 tax reform law
The "Tax Cuts and Jobs Act" (TCJA) passed by Congress is the most extensive tax reform legislation in more than three decades. It impacts the taxes of most taxpayers starting in 2018 (filed in 2019).
There's a lot to TCJA so here are some highlights:
Lower Tax Rates and Changed Income RangesThe new law lowers most of the tax rates and also changes the income ranges where the rates apply.
The current brackets are: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
The new brackets will be: 10%, 12%, 22%, 24%, 32%, 35% and 37%
Click here for a visual comparison of 2017 and 2018 tax rates
Increased Standard DeductionThe new tax law nearly doubles the standard deduction amount. Single taxpayers will see their standard deductions jump from $6,350 for 2017 taxes to $12,000 for 2018 taxes. Married couples filing jointly see an increase from $12,700 to $24,000. These increases mean that fewer people will have to itemize. Today, roughly 30% of taxpayers itemize.
Personal and Dependent ExemptionsThe law eliminates the personal and dependent exemptions which were $4,050 for 2017 and were expected to increase to $4,150 in 2018. Under the old law, the personal exemption plus the standard deduction for 2018 would have been $10,650 while the new law's standard deduction only is $12,000. For married couples, the 2018 numbers would have been $21,300 but is $24,000 under the new law.
Increased Child Tax CreditFor families with children, the Child Tax Credit is doubled from $1,000 per child to $2,000 (but remember you have lost the dependent exemption). In addition, the amount that is refundable grows from $1,100 to $1,400. The bill also adds a new, non-refundable credit of $500 for dependents other than children. Finally, it raises the income threshold at which these benefits phase out from $110,000 for a married couple to $400,000.
Alternative Minimum Tax Exemptions Increased
The income exempted from the individual Alternative Minimum Tax (AMT) rose to $70,300 for single taxpayers (from $54,300) and to $109,400 for married filing jointly (from $84,500).
State and Local Taxes/Home Mortgages
The law limits the amount of state and local property, income, and sales taxes that can be deducted to $10,000. In the past, these taxes generally have been fully tax deductible.
The bill also lowers the cap on deducting home mortgage interest. Under the new law, interest on loans up to $750,000 can be deducted. That's down from $1 million previously.
The bill eliminates the tax penalty for not having health insurance. It also temporarily lowers the floor above which out-of-pocket medical expenses can be deducted from the current law floor of 10% to 7.5% for 2017 and 2018. In 2019, the medical expense threshhold will return to 10%.
Self-Employed and Small Business
The law has a myriad of changes for business, including:
-- Reduction in the top corporate rate to 21%
-- A new 20% deduction for income from "pass-through" entities (partnerships, S Corps, LLC's, sole proprietorships)
-- Almost doubling of the amount small businesses can expense under Section 179 amount to $1 million
-- The corporate alternative minimum tax (AMT) is eliminated