The Senate and the House of Representatives have passed the Tax Cuts and Jobs Act, which contains many provisions that likely affects you. Keep in mind that all changes affecting individuals expire after 2025, and would then revert to current law. Between now and then, expect continued changes as political parties challenge provisions unpopular with their base.
Here are some highlights of the tax reform bill that likely affects you:
Income Tax Rates Reduced – The new reduced individual income tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The bill retains seven tax brackets, while reducing the top tax rates to 37% from 39.6%.
Standard Deduction Doubles – The current standard deduction amounts for 2018 are $6,500 for individuals, $9,550 for heads of household, and $13,000 for married couples filing jointly. The new bill increases the standard deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly.
Personal Exemption Suspended – The current $4,050 personal exemption for individuals, their spouse, and each of their dependents is completely eliminated.
Medical Expense Deduction Expanded – Qualified medical expenses as itemized deductions have been retained. The bill also reduces the threshold for deduction of medical expenses to 7.5% of your adjusted gross income for 2017 and 2018. Afterwards, the threshold would return to the current 10% adjusted gross income limitation.
Home Equity & Mortgage Interest – The bill would modify the home mortgage interest deduction, reducing the limit on “new” mortgages to $750,000, from the current $1 million. Existing mortgages will not be affected. The home equity loan interest deduction would be eliminated through 2025.
Income & Property Tax Deduction Capped – The bill preserves the state and local tax deduction for anyone who itemizes their deductions, but individuals would only be allowed to deduct up to $10,000 in state and local income or property taxes. Previously, there was no limitation.
Child Tax Credit Doubles – The bill increases the amount of the child tax credit to $2,000 per qualifying child under age 17. It would also create a new $500 credit for parents with qualifying dependents, whom they support, but who are not qualifying children.
Repeal ACA Individual Mandate – The final bill repeals the requirement requiring individuals to have health insurance or pay a penalty under the Affordable Care Act. This potentially puts the Affordable Care Act in jeopardy.
Miscellaneous Itemized Deductions Repealed – The bill eliminates miscellaneous itemized deductions typically subject to the 2% floor under current law. This includes deductions for unreimbursed employee business expenses, home office expense deduction, and other 2% itemized deductions. There is no change to the charitable contribution deduction.
Exclusion of Gains from Selling Your Home – The new changes do not affect the rules regarding excluding a gain from the sale of a principal residence. Currently, for married couples, you can exclude $500,000 in capital gains from the sale of your home if you lived in the home for at least two of the last five years.
What to Expect Next?
There are many more changes, including changes to corporations, pass-through entities, alternative minimum tax, and the federal estate tax. Tax reform and major changes to the tax code will affect all individuals and businesses. Your final tax bill may or may not change much, but how you determine your taxes due will change significantly. For some people, the new tax bill would make filing their taxes easier. For most others, the new tax changes create uncertainty and a need to examine one’s tax situation carefully.
In my experience, changes to the tax code make things more complicated. This new tax bill does not differ from ones in the past. The new regulations must be studied, understood, and implemented, and that takes time. The impact on your taxes will be determined by how the changes impact your specific situation. It’s best to ensure you are working with a licensed tax professional to ensure the best possible result.
My name is Noel, and I would be delighted to assist you in navigating the new tax changes. I’m an Illinois Registered Certified Public Accountant with over 23 years of experience, dedicated to providing outstanding tax and accounting services to individuals and business owners. My offices are virtual, so I can help you wherever you are located. Contact me for a complimentary consultation.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
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