Review the article below to identify how the TCJA changes will affect you in 2018 and beyond.
Most Taxpayers are Affected by Changes in the Tax Reform Bill
The TCJA was passed into law at the end of 2017 and made changes that affect all kinds of taxes - individual, corporate, partnership and other "passthrough" business entities, estate, and even tax-exempt organizations.
When Does the TCJA Take Effect?
Most changes from the TCJA took effect on January 1, 2018 and are slated to sunset after December 31, 2025. However, there are a few provisions from the new tax law that have a 2019 effective date and some are retroactive.
Tax Brackets and Tax Rate Change for Most Taxpayers With the TCJA
Individual tax filers will pay tax using a new tax bracket and tax rate structure. However, the tax rates remain progressive, meaning tax rates rise as income increases.
In comparison to previous tax brackets and tax rates, the new rates due to the TCJA are slightly lower and the brackets are generally slightly broader.
|Rates under the TCJA||Pre-TCJA rates|
|10%, 12%, 22%, 24%, 32%, 35%, 37%||10%, 15%, 25%, 28%, 33%, 35%, 39.6%|
Under the 2017 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739.
Under the TCJA tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.
While most taxpayers will pay less, some taxpayers will pay a slightly higher tax rate under the TCJA. This is most likely to impact an upper-middle class individual with a marginal tax rate of 35%, up from 33%.
TAX REFORM MAKES CHANGES TO EXEMPTIONS AND CREDITS
Personal and Dependent Exemptions Are Eliminated
In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if MFJ) and each qualifying child or qualifying relative. Each exemption reduced taxable income by $4,050 in 2017. Under the TCJA, personal and dependent exemptions are eliminated from 2018 through 2025.
Child Tax Credit Increased
Starting in 2018, the TCJA increases the maximum Child Tax Credit (CTC) from $1,000 to $2,000 per qualifying child. The refundable portion of the credit increases from $1,000 to $1,400 and the earned income threshold for claiming the refundable credit is lowered from $3,000 to $2,500. That means taxpayers who don't owe tax can still claim a credit of up to $1,400. The higher child tax credit will be available for qualifying children under age 17, as under previous law.
New Credit for Other Dependents Available
Starting in 2018, the TCJA allows a new $500 nonrefudnable credit for dependents who do not qualify for the CTC. Taxpayers can claim this credit for children who are too old for the CTC, as well as for other dependent relatives, such as parents.
There is no SSN requirement to claim this credit, so taxpayers can claim the credit for children with an Individual Tax Identification Number (ITIN) or an Adoption Tax Identification Number (ATIN) if the otherwise qualify. Taxpayers cannot claim the credit for themselves or their spouse (if MFJ).
As with the CTC, the new credit is available only for U.S. citizens, nationals, or residents. Dependents who reside in Canada or Mexico (unless they are U.S. citizens) may not claim the credit.
CHANGES TO STANDARD AND ITEMIZED DEDUCTIONS
Standard Deduction Increases
The standard deduction has increased. In 2018, the new standard deduction amounts are:
- $12,000 Single
- $18,000 Head of Household
- $24,000 Married Filing Jointly
Because of the increase to the standard deduction and because of changes to the rules for itemized deductions from tax reform, many taxpayers who previously itemized deductions will now claim the standard deduction instead. This means they would not have to file Schedule A. However, taxpayers may want to continue to track their expenses, so they have the information to make the comparison and choose the tax benefit with the bigger value.
Many Itemized Deductions Eliminated, Limited or Modified
Before the tax reform bill took effect, about 30% of taxpayers itemized deductions on Schedule A, instead of taking the standard deduction associated with their filing status. However, the TCJA has a large impact on itemized deductions, as several itemized deductions have been eliminated or modified.
All information above is provided via irs.gov. For further details on the please visit irs.gov