I hope everyone is having an amazing holiday season! The Tax Cuts and Jobs Act (TCJA) has been signed into law as of December 22nd, and there are a number of major changes for individuals and businesses. After digging into the 235 page bill, and additional sources, such as the Tax Policy Center, I developed a summary of items you need to know to properly plan for the upcoming year, and beyond.
There are some common talking points the you’ve probably heard such as “the law lowers taxes for everyone” and “most of the benefit goes to top income earners”. These points are mostly or somewhat true over the short-term, at best. Many of the provisions expire after 2025, with some expiring as soon as 2019. Here is a summary for how individual filers are impacted.
Standard Deductions & Personal Exemptions
Perhaps the most significant change impacting most individual filers, TCJA removes personal exemptions completely, and increases the standard deduction for all filing statuses. Starting in 2018, the new law sets standard deductions at $24,000 for Married Filing Joint & Surviving Spouse, $18,000 for Heads of Households, and $12,000 for Single and Married Filing Separate statuses. By comparison, standard deductions for 2017 are $12,700 for Married Filing Joint & Surviving Spouse, $9,350 for Heads of Households, and $6,350 for Single and Married Filing Separate. Personal exemptions for 2017 are $4,150 per person.
Overall, these changes should cause a net positive impact on your tax liability, but filers with more than three children could see a negative impact. Amendments to the child tax credit, however, could assist in easing any increased tax liability.
Child Tax Credit
The child tax credit gets a significant increase from $1,000 to $2,000 per qualifying child under age 17, and $500 per “other dependent”.
The Tax Policy Center has created several tax calculators that will allow you to get an estimate of how these changes will impact your individual circumstances. Note: these tools should be used for estimate purposes only.
Property and Income Tax Deductions
Deductions for real estate, state income, and personal property taxes are now capped at $10,000 in total. This could significantly harm taxpayers in middle income brackets, because real estate property taxes alone can top $10,000 in most states.
This change may mostly impact filers in areas where the cost of real estate is very expensive, such as California. Under TCJA, the itemized deduction for mortgage interest is allowable for acquisition indebtedness up to $750,000, down from $1M. The interest on home equity debt is no longer deductible under the new plan.
If you follow me on Facebook, you may have seen my recent reference to 2018 being the year for braces, and other costly procedures. For 2017 and 2018 tax years, TCJA decreases the AGI limitation to 7.5% for all tax payers. In 2019, the limitation returns to 10%, and 7.5% for seniors.
The Shared responsibility payment (Individual Mandate) has been repealed going forward. This means that if you do not maintain medical coverage for the entire year, you will no longer be liable for the additional fee. It is still unknown how the insurance industry will respond to this, but some outlets have reported insurance prices beginning to increase in anticipation of fewer subscribers. This will be an item to watch, especially if you are self employed.
529 and Custodial Plans
If you have children and are planning for their education costs, you will be happy to know that under new regulations, savings from 529 plans can now be used for private school tuition, in addition to college expenses. Additionally, the gift tax exclusion increased to $15,000 per year. This means that you and your spouse can now contribute up to $15,000 each into custodial investment accounts. For more information on how these plans work, see my recent discussion on effective investment vehicles for children.