It’s official. The new tax reform bill was signed into law and will affect your 2018 income tax return. Of course, it didn't have an impact on the tax return you filed for 2017. So how will the new tax law affect me, you ask? It will affect your estimated tax payments, the money withheld from your paycheck, and your income tax return for 2018.
All of this means that you need to understand what changes have been made so you can file for 2018 and make sure you're paying in enough taxes so you don’t get hit with penalties and interest. Here are some of the major changes in the new tax law that will likely affect you:
- The standard deduction was increased and exemptions were eliminated.
- Income tax rates and brackets have changed.
- The child tax credit is now more generous.
- Itemized deductions are (generally) less worthwhile.
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1. Increased Standard Deduction and Elimination of Exemptions
The new tax law has big changes when it comes to the standard deduction and exemptions. Exemptions were eliminated altogether, which can hurt some families substantially. That said, the standard deductions have almost doubled, which offers some relief. (See the table below for details.)
|Filing Status||2017 Standard Deduction||2018 Standard Deduction|
|Married filing jointly||$12,700||$24,000|
|Married filing separately||$6,350||$12,000|
|Head of household||$9,350||$18,000|
Because a personal exemption was worth $4,050 in 2017, single filers with no dependents taking the standard deduction will come out ahead. Where the total deduction would have been $10,400, the new law allows $12,000.
A married couple with no dependents filing the standard deduction will come out ahead, too. In 2017, the standard deduction and two exemptions were worth $20,800, but the 2018 standard deduction is $24,000.
Unfortunately, if you have dependents, the increased standard deduction probably won’t offset the loss of the exemptions you would have been able to claim in 2017. Other changes in the law may help lower your tax burden, though.
The major change that comes with the increased standard deduction is the effect on people who used to itemize deductions.
In the past, you could get both itemized deductions and exemptions, but now you can claim only itemized deductions. In addition, the increased standard deduction means that many people who used to itemize may no longer itemize their deductions.
2. Changes in Income Tax Rates and Brackets
The income tax rates and brackets changed in the new 2018 tax law. While the brackets are different for each filing status, the rate structure remains the same across all four filing statuses (single, married filing jointly, married filing separate, and head of household). Below is a comparison of the 2017 tax rates and brackets and the 2018 tax rates and brackets for a single person.
|2017 Brackets||2017 Rates||2018 Brackets||2018 Rates|
|$0 to $9,325||10 percent||$0 to $9,525||10 percent|
|$9,326 to $37,950||15 percent||$9,526 to $38,700||12 percent|
|$37,951 to $91,900||25 percent||$38,701 to $82,500||22 percent|
|$91,901 to $191,650||28 percent||$82,501 to $157,500||24 percent|
|$191,651 to $416,700||33 percent||$157,501 to $200,000||32 percent|
|$416,701 to $418,400||35 percent||$200,001 to $500,000||35 percent|
|$418,401 and up||39.6 percent||$500,001 and up||37 percent|
The big takeaway is that tax rates have generally decreased. While people in the 10-percent tax bracket won’t see a reduction in their rate, most everyone else up to the 24-percent tax bracket should see some relief. But if you were in the high end of the old 28-percent tax bracket, you might pay a bit more income tax on the marginal income in the new 32-percent tax bracket.
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3. The New Child Tax Credit
The new child tax credit has gone through big changes for 2018. The credit was only $1,000 per qualifying child in 2017 and was nonrefundable if you didn’t owe income tax. The 2018 credit is worth $2,000 per qualifying child and is refundable up to $1,400, even if you don’t owe a penny of taxes. The income limit at which the credit phases out has been increased to $200,000 for single filers and $400,000 for those who are married filing jointly.
This bigger credit and its refundability will help offset some of the loss of the exemptions. But as with any tax scenario, the overall impact depends on your personal situation.
4. Changes to Itemized Deductions
Itemized deductions have been significantly changed in 2018. As always, you should only itemize your deductions if the amount will be higher than the standard deduction. With the higher standard deductions in the new tax law, this level is harder to reach. Combined with some of the big changes below, itemizing deductions will probably become much less popular than in the past.
Medical and dental costs actually work out in your favor, as you can deduct expenses that exceed 7.5 percent of your adjusted gross income rather than the old 10 percent threshold, giving you 2.5 percent more to deduct.
State and local taxes are still itemized deductions, but they’re much more limited than in the past.
In previous years, you could deduct state income tax or state sales tax plus property taxes with no caps. In 2018, you’ll be able to deduct only a combined $10,000 of these taxes in your itemized deductions.
How mortgage interest is treated has also changed. You’ll no longer be able to deduct interest on home equity debt, and mortgage debt interest will be capped at a mortgage value of $750,000 rather than the previous $1 million limit.
If you are handling your own deductions, make sure you work with the product that's best for your needs.
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How Will the New Tax Law Affect Me? Final Thoughts
The hundreds of pages detailing the new tax code haven’t been translated into applicable IRS forms yet, so the final impact of the entire code is still not fully understood. As always, you should consult a tax professional with any concerns about your personal situation.