The Tax Cuts and Jobs Act passed in December 2017 and went into effect for the tax year of 2018. We have had over nine months to study the new law, and we thought it was time to share how it is going to affect the majority of hardworking, everyday Americans.
Standard Deduction Increase
The first significant change is the standard deduction, which has been increased.
- Single filers: The 2017 deduction was $6,350; the 2018 deduction is $12,000.
- Married filing jointly (MFJ): The 2017 deduction was $12,700; the 2018 deduction is $24,000.
The near doubling of the standard deduction will mean that fewer people are filing Schedule A for itemized deductions. It also means that Americans with low incomes (below $12,000 single and below $24,000 MFJ) will likely not owe any taxes.
The one trade-off for the increased standard deduction? There is no longer a personal exemption ($4,050) for eligible taxpayers.
Tax misconception: As a taxpayer, you either take the standard deduction or itemize your deduction. What this means is that everyone who files taxes will get at least $12,000 or $24,000 (depending on filing status).
Tax Brackets Lowered
Source: Business Insider
As you can see from the above images, there are a lot fewer tax brackets in 2018. For the most part, the income ranges have been increased as well.
Tax misconception: Most people have no clue how the tax bracket system works. We have found that most people think that if you make $75,000, then you look at the bracket and pay 15% tax. That is false.
The tax bracket system works like filling a bucket with water. For example, everyone’s first $19,051 is taxed at 10%; everyone’s next dollar over that amount is taxed at 12%, up to $77,400. The next dollar above $77,400 is taxed at 22%.
SALT Deductions Reduced
The most controversial part of the new tax law is the State, and Local Tax (SALT) deduction, encompassing state taxes, property taxes, and sales taxes.
The big change for 2018 is the amount you are allowed to deduct for SALT, which has been reduced to $10,000. There previously was no cap. The catch is, the SALT deduction was only used by people who filed Schedule A (itemized deductions).
Example: If your property taxes are $8,000 and you paid $6,000 in state taxes, you can deduct only $10,000 from your taxes, not $14,000 as under the previous tax law.
This change is obviously a major negative for people who live in California, as one of the perks of paying high state taxes was the ability to take a write-off on your federal taxes!
Mortgage Interest Deductions
Staying on Schedule A, the amount of interest you are allowed to deduct for having a mortgage has changed under the new tax law. The mortgage debt is now capped at $750,000, although if you purchased a home before 2018, you are grandfathered into the old rules.
You are also no longer allowed to deduct interest payments on home equity lines of credit (HELOCs) unless the debt is used for home improvement. Unlike mortgage interest, HELOCs before 2018 were not grandfathered in.
Child Tax Credit
Finally, for families with little ones, the Child Tax Credit has doubled from $1,000 to $2,000 per child. The credit begins to phase out at income levels above $400,000. This increase will allow more families to take advantage of the credit.
Tax tip: A tax credit is more valuable than a tax deduction. A credit reduces your taxes owed. For example, if you owe $40,000 in taxes and you have a $2,000 tax credit, you now owe $38,000. If you prepaid $41,000, you are now getting a refund of $3,000!
One final tip is to check the withholdings from any of your paychecks to make sure you are having the proper amount withheld for the new tax law.