New 2018 Tax Law’s Individual Tax Changes: New Tax Brackets, Credits and Deductions

President Donald Trump signed the new 2018 tax law “Tax Cuts & Jobs Act” (TCJA) last week.  The new TCJA law is a sweeping overhaul of the tax code.

Generally, the provisions in the TCJA take effect on January 1, 2018. Most of the provisions affecting individuals are temporary and “sunset” after 2025, while the majority of business provisions are permanent. Most individual taxpayers will not see the changes until it affects their paycheck tax withholding, likely in February. The reform affects taxes for the 2018 year and beyond, starting with tax returns that must be filed by April 2019.

The following is a summary on some of the important individual tax changes:

  • Tax rates: The new law lowers tax rates for individuals and adjusts the bracket amounts. For 2018 through 2025, the tax rates are 10%; 12%, 22%; 24%; 32%; 35% and 37%. In addition, a chain CPI index will be used for future indexing, thereby reducing the size of annual adjustments.
  • Standard deductions: The standard deduction is effectively doubled to $12,000 for single filers and $24,000 for joint filers, while the additional standard deductions for the elderly and blind are retained.
  • Personal exemptions: Personal exemptions, including exemptions available for qualified for dependent children and relatives, are repealed. Accordingly, the personal exemption phase out (PEP) rule also goes away.
  • Alternative minimum tax: The alternative minimum tax (AMT) system is retained, but exemption amounts, as well as the thresholds for phasing out exemptions, are significantly increased. In addition, these figures will be indexed for inflation in future years.
  • Child tax credit: The child tax credit (CTC) is doubled from $1,000 per qualified child to $2,000, subject to a phase-out for high-income taxpayers. Under a late amendment, $1,400 of this credit is refundable. In addition, the new law creates a $500 nonrefundable credit for non-child dependents.
  • State and local taxes: In a controversial provision, the TCJA limits the deduction for state and local income taxes (SALT) to $10,000 annually for any combination of state and local property taxes or (2) state and local income taxes or sales taxes.
  • Mortgage interest: Although deductions for prior debt is grandfathered, the new law limits the mortgage interest deduction to interest paid on the first $750,000 of acquisition debt, down from $1 million. It also eliminates deductions for interest paid on home equity debt.
  • Medical expenses: While other itemized deductions are eliminated or scaled back, the deduction for medical expenses is temporarily improved. For 2017 and 2018, the threshold for deducting medical expenses reverts to 7.5% of AGI, the threshold in effect prior the law prior to the Affordable Care Act (ACA).
  • Casualty and theft losses: This itemized deduction is eliminated, but it is preserved, with certain modifications, for losses incurred in federal disaster areas.
  • Section 529 plans: The list of qualified expenses for Section 529 plans is expanded to include tuition at an elementary or secondary public, private or religious school, plus home schooling expenses, for up to $10,000 per year.
  • Roth IRAs: The rule permitting taxpayers to recharacterize a Roth IRA back into a traditional IRA after a conversion is repealed.
  • Health insurance: The new law repeals the health insurance mandate for individuals established by the ACA. This change doesn’t take effect until 2019.
  • Estate tax: The federal estate tax exemption is doubled, resulting in an inflation-indexed exemption of $11.2 million in 2018.

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