Almost all of the Tax Cuts and Jobs Act (TCJA) changes that will affect individual taxpayers kick in starting with your 2018 Form 1040. Here are the 10 changes that are most like to affect your return.
1. Lower individual rates
As did prior law, the TCJA has seven tax rate brackets. But five of the rates are lower. Here are the 2018 rates and brackets.
|2018 Individual Federal Income Tax Brackets|
|10% tax bracket||$0-9,525||$0-19,050||$0-13,600|
|Beginning of 12% bracket||$9,526||$19,051||$13,601|
|Beginning of 22% bracket||$38,701||$77,401||$51,801|
|Beginning of 24% bracket||$84,501||$165,001||$82,501|
|Beginning of 32% bracket||$157,501||$315,001||$157,501|
|Beginning of 35% bracket||$200,001||$400,001||$200,001|
|Beginning of 37% bracket||$500,001||$600,001||$500,001|
|*Head of household|
Most folks will benefit from the new rates, but some who were in the 33% marginal tax bracket in 2017 will find themselves in the 35% marginal bracket in 2018. This unfavorable change will mainly affect singles and heads of households with taxable income between $200,000 and $400,000. However, the new lower rates on income below $200,000 will offset some or all of the negative effect of being in the 35% marginal bracket.
2. Much bigger standard deductions but no more personal and dependent exemptions
The TCJA almost doubled the standard deduction amounts for 2018. However, personal and dependent exemption deductions, which would have been $4,150 each for 2018, were eliminated. These changes will benefit some taxpayers and harm others. If you have lots of dependents, you may not be pleased. The 2018 standard deduction amounts are as follows.
* $12,000 for singles (up from $6,350 for 2017).
* $24,000 for married joint-filing couples (up from $12,700).
* $18,000 for heads of households (up from $9,350).
Additional standard deduction amounts for the elderly and blind are allowed by the TCJA, as under prior law.
3. New limits on deductions for state and local taxes
Under prior law, you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. You could also choose to forego any deduction for state and local income taxes and instead deduct state and local general sales taxes.
For 2018, the TCJA limits your deduction for state and local income and property taxes to a combined total of $10,000, or $5,000 if you use married filing separate status. You cannot deduct foreign real property taxes. You can still choose to deduct state and local general sales taxes instead of state and local income taxes, subject to the overall $10,000/$5,000 limitation.
4. New limits on home mortgage interest deductions
For mortgages taken out after 12/15/17, the TCJA reduces the maximum amount of mortgage debt used to acquire a first or second residence for which you can claim itemized interest expense deductions. Under prior law, the mortgage debt limit was $1 million, or $500,000 if you used married filing separate status. For 2018-2025, the debt limit is $750,000, or $375,000 if you use married filing separate status. However, this change does not affect home acquisition mortgages taken out under binding contracts that were in effect before 12/16/17, as long as your home purchase closed before 4/1/18.
Also, the old-law $1 million/$500,000 debt limits still apply to home acquisition mortgages that were taken out under the old-law rules and then refinanced after the TCJA took effect, as long at the refinanced loan principal does not exceed the old loan balance at the time of the refinancing.
Finally, the TCJA disallows 2018 interest deductions for most home equity loans.
Note: For full details on how the TCJA changes affect home mortgage interest deductions, see this previous Tax Guy column.
5. Alternative minimum tax made less expensive
Unfortunately, the TCJA retained the individual alternative minimum tax (AMT), but the AMT exemption deductions are significantly increased and phased out at much higher income levels for 2018. Under prior law, AMT exposure was often caused or made worse by high itemized deductions for state and local income and property taxes and lots of personal and dependent exemption deductions. Those breaks were disallowed under the AMT rules. With the TCJA’s new limits on deductions for state and local taxes, the elimination of personal and dependent exemption deductions, and larger AMT exemption deductions, many previous victims of the AMT will find themselves off the hook for 2018. Those who are still on the AMT hook will probably owe significantly less, thanks to the TCJA changes.
6. Child tax credit increased
For 2018, the TCJA doubled the maximum child credit to $2,000 per qualifying child. Up to $1,400 of your credit can be refundable, meaning you can collect it even if you don’t actually owe any federal income tax.
7. New $500 tax credit for other dependents
For 2018, the TCJA introduced a new $500 tax credit for qualified dependents who are not under-age-17 children. So your live-in mother in law might make you eligible for this new break.
8. No more breaks for moving expenses
For 2018, the deduction for moving expenses is eliminated, except for certain military personnel. Employer reimbursements for moving expenses are no longer tax-free, except for certain military personnel.
9. New limit on itemized deductions for personal casualty losses
For 2018, you can only deduct personal (nonbusiness) casualty losses if they are due to a federally declared disaster. I’ll cover this change in detail in a future column.
10. No more miscellaneous itemized deductions
Under prior law, you could write off so-called miscellaneous itemized deductions to the extent they exceeded 2% of your adjusted gross income (AGI). This rule potentially allowed you to deduct things like unreimbursed employee business expenses, investment expenses, tax-related expenses, and union dues. For 2018, the TCJA eliminated itemized write-offs for miscellaneous deductions that were subject to the 2%-of-AGI threshold under prior law.
The last word
This is not really the last word. I’ll cover how some of the aforementioned changes affect 2018 returns in more detail in future columns. So please stay tuned. Meanwhile, see this Tax Guy column for an explanation of how the new-and-improved 2018 Form 1040 is much different from the old version.