What Does the New Tax Law Mean for Individual Taxpayers?

With the implementation of the new federal tax bill, changes to the 2018 tax year are set to take place and will continue through 2025. It’s important to understand that your 2017 tax return will not be affected by these new tax regulations. However, it’s good to understand the future changes taking place so you can have your tax planning in order when the time comes to file next year.

The Tax Cuts and Jobs Act (TCJA) is the most significant federal tax legislation overhaul in more than 30 years. Much of the new tax law is focused on businesses, but there are also many notable changes that affect individual taxpayers. Let’s look at some of the key adjustments you need to know about.

Adjustments for Inflation
The chained consumer price index (C-CPI-U) will now be used to calculate annual inflation adjustments. This will impact tax bracket thresholds, certain exemptions, the standard deduction and some other tax figures. They should increase at a slower rate than the index used through 2017 and may push some taxpayers into higher tax brackets.

Tax Bracket Changes
The TCJA still keeps individual taxpayers broken down into seven tax brackets. Most of them will pay a lower tax percentage than before. The adjusted gross income amounts will continue to change with inflation each year, but here are the percentage comparisons below:

2017    2018-2025
10%     10%
15%     12%
25%     22%
28%     24%
33%     32%
35%     35%
39.6%  37%

Standard Deductions and Personal Exemptions
The new tax bill effectively suspends personal exemptions from 2018-2025. However, the amount for standard deductions is almost doubled for those who don’t itemize deductions. This is to help reduce the number of people who itemize their tax returns. Singles and separate filers can claim $12,000 as their standard deduction for 2018. That amount is $18,000 for heads of households and $24,000 for joint filers. These amounts will be adjusted for inflation with each year.

Family Tax Credits
The TCJA makes the child credit available to more families and the credit has been doubled to $2,000, though the maximum refundable amount is $1,400. A $500 nonrefundable credit is also available for other qualifying dependents who are not children.

State and Local Tax Deductions
The new tax law sets a maximum of $10,000 that can be deducted for the aggregate of state and local taxes paid in the form of income, sales taxes or property taxes.

Mortgage Interest Deduction
The TCJA puts more limits on the itemized deduction for mortgage interest paid. For those with mortgage debt prior to December 15, 2017, they will stay at the $1 million mortgage debt limit, while anyone incurring mortgage debt after that date will be subject to a $750,000 mortgage debt limit.

AMT and Estate Tax
The alternative minimum tax (AMT) and the estate tax were not repealed, but the new tax law makes these exemptions available to fewer taxpayers than previously.

Other Credits, Exclusions and Deductions Affected
There are plenty of other things affected by the TCJA:

  • Qualifying medical expense deductions are still in effect
  • Certain itemized deductions are subject to the 2 percent floor, including home office deductions, professional fees, investment expenses and employee business expenses.
  • Moving expenses are no longer deductible, and neither are personal casualty or theft-loss deductions (except in a case where a disaster was declared by the President).
  • Charitable cash contribution deduction limits will be raised from 50 percent up to 60 percent.
  • Alimony payments are no longer deductible.
  • 529 plan savings plans will be tax-free.

Needless to say, a lot will change and many individual taxpayers will be affected in one way or another. It’s more important than ever to seek the help of a seasoned tax professional who can help you make the right decisions and file accurate tax returns in the coming years. Whether you own a business or are just paying your individual taxes, Ferguson, Timar & Company can help with your tax planning and tax preparation under the new tax laws. Contact us today to prepare your 2017 tax return or to help plan for your 2018 taxes.