The new Tax Act that was signed into law in late 2017 includes many changes for individual taxpayers. Most of these changes have taken effect for income earned beginning January 1, 2018. Here’s what you need to know about the most important changes:
Tax Act Changes Affecting Individual Taxpayers
New Rates and Brackets
For income earned in 2018 through 2025, all but the lowest tax brackets will be paying a lower rate on taxable income. Here’s an example of what taxpayers who are married filing joint can expect (get a look at the complete breakdown here):
- 10% rate will apply to income of $19,050 or less
- 12% rate begins at $19,051
- 22% begins at $77,401
- 24% begins at $165,001
- 32% begins at $315,001
- 35% begins at $400,001
- 37% begins at $600,001
Capital Gains & Dividends
The new Tax Act does not change the rates for long-term capital gains and dividends. There is, however, a slight change in inflation adjustments which nudges the brackets a bit. For example, taxpayers who are married and filing joint pay no tax for long-term capital gains and dividends under $77,199; 15% beginning at $77,200; and 20% beginning at $479,000. Single taxpayers pay no tax under $38,599; 15% beginning at $38,600; and 20% beginning at $425,800.
Alternative Minimum Tax
The purpose of the AMT was to ensure taxpayers with higher incomes did not take advantage of “loopholes” and deductions that may not be available to most households to avoid income tax obligations. Under the new Tax Act, the eligibility has been changed so that only about 200,000 very high earning taxpayers will be subject to this tax.
Deductions & Exemptions
The new Tax Act has increased the standard deduction to $12,000 for single filers, $24,000 for married filing joint, and $18,000 for head of household filers while eliminating personal and dependency exemptions. The following deductions have also changed:
- State and Local Income Tax and Property Tax: Deductions have been capped at a combined total of $10,000 ($5,000 for married filing separate), and foreign property taxes are no longer deductible.
- Mortgage Interest: Deductions have been reduced so that interest on up to $750,000 of mortgage debt ($375,000 for married filing separate) is deductible – down from $1 million.
- Medical Expenses: For 2018, medical expenses in excess of 7.5 percent of AGI are deductible. After 2018, the deduction returns to 10% of AGI.
The net result is likely to be more taxpayers choosing the standard deduction rather than itemizing to take advantage of deductions and exemptions.
The new Tax Act boosts the child tax credit to $2,000 – increased from $1,000 in previous years. Plus, the maximum income levels to be eligible for this credit have been increased dramatically – up to $400,000 for married filing joint. The result is a higher credit that is available for almost all children under 17. Up to $1,400 of this credit can be taken as a refund for households that don’t owe any federal income tax. An additional $500 nonrefundable credit is available for qualifying children ages 17 and 18, full-time students up to age 23, any disabled children, and other qualifying adult relatives.
Under the new Tax Act, taxpayers are no longer able to reverse the conversion of a traditional IRA into a Roth IRA and avoid taxes due.