The 2017 Tax Cuts and Jobs Act (TCJA) was one of the most sweeping tax code revisions in decades. Most of its provisions came into effect on January 1, 2018, and most of the changes will expire at the end of 2025 unless Congress extends them. While they are likely temporary, the changes can have a potentially big impact on your taxes. Let's look at some of the most important provisions:
Tax rates and brackets were changed.
The TCJA has maintained seven categories of taxes but is making significant changes to tax rates. Tax rates and brackets work in unison and aim to lower taxes for most taxpayers.
For example, in 2018, the maximum tax bracket for couples filing a joint return was previously 39.6% and applied to income over $480,050. According to the revised tax code for 2018, the maximum rate is 37% and applies to income above $600,000 for married/spousal taxpayers.
The standard deduction was increased.
The revised tax law nearly doubled the standard deduction to $12,000 from $6,350 for single taxpayers and $24,000 from $12,700 for married taxpayers (values for 2018). About 70% of taxpayers claim the standard deduction, which includes most low- and middle-income households. The increase in the standard deduction and the increase in the child tax credit aims to reduce taxes for most of these families.
Some itemized deductions have been reduced or eliminated.
The revised law reduced or eliminated many itemized deductions in favor of a higher standard deduction. These changes include the following:
All the miscellaneous itemized deductions are removed. This includes deductions for unreimbursed tax preparation fees, investment advisory fees, and business expenses.
The mortgage interest deduction is limited to $750,000 of debt. However, those who had a mortgage debt of $1,000,000 before December 12, 2017, can still deduct the interest on that loan.
The deduction for state and local income taxes, real estate taxes and property taxes is capped at $10,000.
Here are the detailed deductions that have remained relatively unchanged and even slightly improved with TCJA:
Charitable donations: The revised law retains all significant deductions for charitable donations and increases the limit on cash donations to 60% from 50% of adjusted gross income (AGI).
Medical expenses: The revised law maintains the deduction for medical expenses and temporarily reduces the limit from 10% to 7.5% of the adjusted gross income for the fiscal years 2017-2020. From 2021, only medical expenses exceeding 10% of adjusted gross income are deductible.
Note: For 2020 only, you can deduct up to 100% of the AGI for cash donations to certain charities under the CARES (Coronavirus Economic Relief, Aid and Security Act) Act.
All other things being equal, if you live in a high-income household, in a high-tax state, with a high mortgage and high property taxes, these changes can increase your tax debt. However, part of the negative impact will be offset by changes in tax rates and intervals.
If you did not normally itemize your deductions before the TCJA or if your itemized deductions are traditionally lower than the new standard deduction put in place with the TCJA, these changes should not be a problem. The increase in the standard deduction will benefit you.
The child tax credit has increased.
The tax law increased the child tax credit from $1,000 to $2,000 and raised families' income levels eligible for the credit. Prior to the TCJA, only households with incomes below $75,000 for the individual filer or $110,000 for the joint filer were eligible for this loan. Now, households with an income of less than $200,000 as an individual taxpayer or $400,000 as a joint taxpayer can claim this tax credit.
In general, tax credits are better than tax deductions because credits reduce taxes dollar by dollar, while deductions only reduce taxable income. This change was supposed to benefit many low and middle-income families with kids.
Elimination of the personal exemption and dependent deduction
The revised law eliminated the personal exemption and the salary deduction. However, combined with the enhancement of the standard deduction and the enhancement of the child tax credit, low- and middle-income families should have seen a net benefit despite eliminating these deductions.
However, higher-income taxpayers may see a tax increase as a result of this change if they have large families and do not qualify for the child tax credit.
The Alternative Minimum Tax (AMT) has been amended but not removed.
The revised law increased the value of the exemption and the removal of the exemption from the single AMT. From 2018 to 2025, the amount of the AMT exemption increases to $113,400 for married taxpayers filing jointly and to $72,900 for all other taxpayers. The elimination limits were increased to $1,036,800 for married filers filing jointly and to $518,400 for all other taxpayers (2020 values).
These changes should have benefited many middle and upper-income families who were previously affected by this tax.
The treatment and calculation of the cost basis on investment sales remain unchanged.
The Senate tax bill included a provision requiring investors to use the first-in, first-out (FIFO) method to calculate the cost of sales for the investment. Investors can breathe a sigh of relief because this provision was not included in this tax law.
Taxation of income from pass-through entities has changed.
This is a complex area of tax law, and the TCJA has included several changes in the taxation of the income of ceding entities, such as S corporations, limited liability companies, and trading companies. The law generally allows companies to exclude 20% of their net taxable income, subject to certain restrictions. The deduction may also be limited or prohibited for certain service professions, such as lawyers, doctors, and accountants, on the basis of an income limit.
In general, changes in the taxation of pass-through entities are expected to benefit many entrepreneurs, but many utility companies may not reap the full benefits of these changes.
The corporate tax rate has decreased.
The revised tax law reduced the corporate tax rate to a fixed rate of 21%, compared to over 35% in the previous system. The corporate tax rate cut was intended to increase the profits of many companies, provide additional capital to grow the business, increase dividends for shareholders, and make the United States a more attractive place for business foreigners.
No changes were made to the tax-deferred retirement accounts.
At the start of the tax debate, there were rumors that there could be changes in the deductions that taxpayers receive for contributing to deferred retirement accounts, such as IRAs or 401(k) retirement plans. The revision of the tax legislation did not include any modification of the deferred tax accounts.
Bottom Line
It is important to note that the impact of any of these changes on your personal tax will depend on your particular situation. Therefore, each of these tax changes should not be assessed separately. Plus, the individual components of your taxes, including your income, credits, deductions, and other factors, work together as interactive tools.
Due to the many changes in tax law at the TCJA, it is more important than ever to meet with a tax or financial planning professional to discuss your particular situation and ensure that you are maximizing your tax benefits per these tax laws.
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