If you’ve been following the latest updates on the Trump tax plan, you may be wondering what the new rules set forth by Congress as part of the Tax Cuts & Jobs Act, or TCJA, will mean for you when you file your 2018 taxes. The truth is, the major tax reform passed by Congress may have a significant impact on your tax situation in the coming year. We’re here to help you know the facts about the new tax plan, what it entails, and how it will affect you when tax season comes back around.
If you’re married and filing jointly for the year 2018, we have good news- your standard deduction will increase to $24,000, up from the $13,000 it would have been under the previous tax law.
Single, or married and filing separately? Your standard deduction will now be $12,000 instead of the $6,500 deduction you received in 2017.
If you file as head of household, your standard deduction under the new tax plan will be $18,000- a sizeable jump from the $9,550 deduction in the previous tax year.
One of the most significant changes under the Trump tax plan is the elimination of personal exemption. Prior to 2018, a personal exemption was automatically available for all taxpayers.
Top Income Tax Rate
Individuals with annual incomes exceeding $500,000 will be the most affected by the new top income tax rate of 37 percent. If you are married and filing jointly, the top tax rate will apply to a combined annual income of $600,000 or greater. The new tax plan also makes changes to other income tax brackets, as the chart below illustrates:
These new individual tax rates are effective from 2018 through 2025.
Estate and Gift Tax
The exemption for estate and gift tax is now twice as much under the new tax plan as it was in 2017, at $11.2 million per individual and $22.4 million per married couple filing jointly.
Child Tax Credit
Up from $1,000 per qualifying child in 2017, the new child tax credit under TCJA is $2,000. Dependents who do not qualify for the child tax credit are eligible for a $500 credit under the new tax plan.
Under the Trump tax plan, the deduction for interest on mortgage balances taken out after December 15 of the previous year is now $750,000. However, the limit for any mortgage loan established prior to December 15, 2017 is still $1 million.The biggest change is that starting with the 2018 tax return, any mortgage debt not used to acquire, build, or improve a primary residence will no longer be deductible and this change is retroactive. The actual use of the funds, not what lenders call the loan, determines deductibility. Taxpayers need to review existing loans and determine what percent was used for a purpose other than buying, building or substantially improving a primary home, as this can no longer be deducted.
State and Local Taxes
Itemized deduction for both income and property taxes paid in 2018 is now limited to $10,000.
Retirement Savings Contribution Limits
If you or your spouse are employees participating in certain retirement plans, such as 401k, 403b, the Thrift Savings Plan, or most 457 plans, you are now able to contribute up to $18,500 this year- that’s up from $18,000 in 2017.
If you contribute to an individual retirement account (IRA), you will notice higher income ranges in line with cost-of-living adjustments. Single taxpayers’ IRA contributions will have a limit between $63,000 and $73,000. Married taxpayers who are filing jointly will have an IRA contribution limit range between $101,000-$121,000 if both spouses also have access to an employer plan. If one or neither spouse has access to a retirement plan through his or her employer, the IRA contribution limit ranges between $189,000-$199,000.
The phaseout for married taxpayers filing separately with access to an employer retirement plan has not changed- the range for IRA contributions is still $0-$10,000 per year.
Alternative Minimum Tax (AMT)
Tax law H.R.1 temporarily increases the Alternative Minimum Tax (AMT) exemption amounts for the tax years 2018 through 2025. Under the new tax plan, the AMT exemption amounts are as follows:
$109,400 for married taxpayers filing jointly or surviving spouses
$70,300 for single or head of household filers
$54,700 for married individuals who are filing separately
The Trump tax plan also raised the AMT exemption phaseout levels, causing the AMT to apply to an income level of $1 million for married couples filing jointly or surviving spouses, and $500,000 for all other individuals. Due to the reduction of deductible state and local taxes, sales tax, and property tax, the number of taxpayers subject to the AMT is expected to decrease significantly.
The new tax plan includes permanent modifications to 529 college savings plans. Beginning after December 31, 2017, participants in the 529 plan may withdraw up to $10,000 per student for the designated beneficiary’s tuition-related expenses at a private, public, or religious elementary or secondary school. The Trump tax plan also temporarily allows the discharge of student loans due to death or total permanent disability to be excluded from income in tax years 2018 through 2025.
The new tax plan repeals alimony payment deductions, as well as the inclusion of alimony payments in the income of the recipient, for all divorces or separations executed after December 31, 2018. If you currently pay or receive alimony, your tax situation will not change.
Affordable Care Act (ACA)
Also known as ObamaCare, the Affordable Care Act introduced a penalty for not carrying personal medical insurance. The new tax plan eliminates this penalty beginning January 1, 2019; however, it will stay in effect during the 2018 tax year.
Of course, these guidelines are just an overview of the TCJA – make sure to contact Karen Schwimmer, CPA with questions about how the new tax plan will affect your specific tax filing situation and unique circumstances for the 2018 tax year. Karen is here to help you find out what you need to know about filing your 2018 taxes so you can plan ahead and be prepared when tax season rolls around!