Now that the most significant tax bill in 30 years has passed into law, everyone is asking one thing: Will my taxes go up or down? Read on for the answer to that question and more.
Are the new rules in effect now?
The new tax law took effect on January 1, 2018, and expires in 2025. Some changes (i.e., tax deductions) technically won't affect you until you file your 2018 tax returns in April 2019.
Is my income tax rate lower?
The new tax law brings tax cuts to almost all of the seven tax brackets. To find your new income tax rate, see Table 1 at the end of this post. Most American workers should see less money withheld from their paychecks by the Internal Revenue Service (IRS). The IRS expects to issue new guidance about tax withholding this month (January 2018), and the taxes that come out of your paycheck could change in February.
How does the new tax law affect my tax deductions?
The new tax law eliminates or restricts many itemized deductions and approximately doubles the standard deduction. Taxpayers claim deductions to reduce the amount of their income that is subject to taxation (their taxable income). They can choose to take a standard deduction or itemize their deductions, based on whichever approach helps them pay lower taxes that year. The changes below may give taxpayers less incentive to itemize going forward.
Which tax deductions were eliminated?
- Personal exemptions: You can no longer reduce your taxable income by claiming yourself, your spouse, and most dependents on your tax return. (For 2017, the exemption was $4,050 per person.)
- Employee expenses: Employees can no longer deduct unreimbursed job expenses (like tools and supplies, work uniforms, and work-related travel).
- Alimony: For couples who sign divorce or separation paperwork after December 31, 2018, the person paying alimony will no longer be able to deduct the payments.
- Home equity loan: You can no longer deduct home equity loan interest, which was previously deductible up to $100,000.
- Casualty and theft losses: You can no longer deduct personal losses that exceed 10% of your income unless the loss occurs in a federally declared disaster.
- Moving expenses: You can no longer deduct moving expenses when you move for a job 50+ miles from your former home, unless you’re in the military.
- Tax preparation: You can no longer deduct the cost of doing your taxes, such as the cost of a tax advisor or tax preparation software.
- Bicycle commuting: You can no longer deduct up to $20 from your income per month for the cost of bicycle commuting to work.
Which tax deductions were modified?
- Standard deduction: The standard deduction was roughly doubled -- from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples filing jointly.
- Child tax credit: Single and married filers can now claim a $2,000 credit for each qualifying child under the age of 17 (double the previous credit of $1,000), and it’s refundable up to $1,400. They also can take a nonrefundable $500 credit for each non-child dependent, such as an elderly parent, and dependent child age 17 or older.
- State and local income taxes, property taxes, and sales taxes: Taxpayers can now only deduct up to $10,000 in total state and local income taxes and property taxes. Previously these deductions were unlimited. This change especially hurts people in high-tax states. Ex: The average Californian deducted $18,400 in 2015, much more than the new $10,000 limit. Taxpayers who live in states with no income tax can choose to apply the sales tax deduction toward the $10,000 limit instead.
- Charitable contributions: Taxpayers can now deduct charitable donations of up to 60% of their income (up from 50%). Also, donations made to a college in exchange for athletic ticket privileges are no longer deductible.
- Medical expenses: In 2018 and 2019, you can deduct health care expenses that exceed 7.5% of your gross income, down from 10% currently. The threshold goes back to 10% in 2020.
- New homebuyers: For new buyers, the home mortgage interest deduction is available for mortgages up to $750,000, down from $1 million. The mortgage interest deduction is staying in place for all homeowners with existing mortgages.
Which tax deductions remain the same?
- Student loan interest: You can still deduct up to $2,500 on the interest paid for student loans. This phases out as your income goes up, so, by the time you're a single earner making $80,000 or a couple earning $165,000, you don't get the deduction.
- Tuition waivers: Some graduate students get free tuition in exchange for teaching or research, and the free tuition is not taxed as income. This stays the same.
- Employer tuition help: Employers can still contribute up to $5,250 a year to your tuition for qualifying continuing education programs, and you don't pay tax on that.
- Teacher costs: Educators can continue to deduct up to $250 to offset what they spend on classroom materials.
Are there any other key changes?
- Tax-free 529 education accounts: You can now use up to $10,000 per year tax-free from 529 college savings accounts for private K-12 tuition or the cost of home-schooling. Until now, 529 funds could only be used for college tuition.
- Healthcare penalty: The tax law eliminates the penalty for not having health insurance starting in 2019. The penalty is $695 per adult and $347.50 per child (or up to 2.5% of household income, whichever is higher.) Those thinking about forgoing health care should know that medical debt is the top reason for personal bankruptcy.
- Employer-subsidized commuting: The tax plan eliminates the tax incentive for private employers that subsidize their employees' transportation, parking, and bicycle commuting expenses.
The choice is yours
It’s estimated that the vast majority of Americans will now choose to take the standard deduction (rather than itemize their deductions) when they file their tax returns in 2019. Whether that ultimately saves or costs them money will vary widely based on each filer’s income, number of children, state of residence, charitable contributions, and other factors. For more details on the tax law, visit Congress.gov.