The Tax Cuts and Jobs Act made big changes to how the government calculates your income taxes. These changes apply to your 2018 federal tax return, due April 15 (April 17 in Maine and Massachusetts).
The new law may simplify filing and reduce taxes for many people. It
Lowers tax rates
Increases the standard deduction
Doubles the child tax credit
Creates a new “other dependents” credit
Or, depending on your situation, the new law may make your tax bill the same or higher than last year. It
Eliminates the personal and dependent exemptions
Limits or eliminates many itemized deductions
The Internal Revenue Service (IRS) expects that most people will pay less tax for 2018 than they did for 2017.
Tax Rates Go Down
There are still seven tax rates, but most of them have gone down. The top tax rate is now 37%, down from 39.6% last year. Compare the 2018 and 2017 tax rates and brackets to see where you fall.
Standard Deduction Grows
The law nearly doubles the standard deduction for most filers. The standard deduction for 2018 is
$12,000 for individuals
$18,000 for heads of household
$24,000 for married couples filing jointly
Standard Deduction Versus Itemizing
Deductions lower the amount of income that you pay tax on. You can take the standard deduction or you can itemize deductions. Your standard deduction may now be greater than your total itemized deductions. Learn how to decide to take the standard deduction or to itemize.
Personal and dependent exemptions are eliminated
Last year, you could take exemptions of $4,050 each for yourself, your spouse, and your dependents. These exemptions lowered your taxable income. Even though personal exemptions are no longer available, the higher standard deduction and increases in other credits may help offset their loss.
Child Tax Credit Doubles to $2,000
Tax credits are better than deductions because they reduce your tax bill dollar-for-dollar. The Child Tax Credit now reduces your taxes up to $2,000 per child under 17. Many more families will qualify for the credit as income limits have gone up to
$200,000 for individual filers, compared to $75,000 last year
$400,000 for married filing jointly, compared to $110,000 last year
This is a “refundable” credit, meaning you can get up to $1,400 per child back even if your 2018 tax bill is $0. You must claim the credit on your tax return to get it.
Social Security Number Now Required for Child Tax Credit
Any child you claim for the Child Tax Credit must now have a Social Security number. They must have the number by the due date of your tax return (including extensions).
New $500 Credit for Other Dependents
You can now claim a credit for your other dependents, including kids 17 and up and other relatives. To qualify, a dependent must be a U.S. citizen, U.S. national, or U.S. resident alien.
Many Itemized Deductions Have Been Eliminated or Capped
These are many of the changes. If you itemize, check for new rules in each category.
State and Local Taxes
Deductions for state and local taxes are now limited to $10,000 combined. This includes income, sales, and property (including real estate) taxes.
Home equity loan interest is now deductible only if you use the money to build or renovate your home.
Mortgage interest deductions on homes bought in 2018 have a new, lower limit. You can deduct interest on mortgages up to $750,000 for homes bought after December 15, 2017. The limit on homes bought on or before that date remains at $1,000,000.
You can no longer deduct moving expenses. The exception to this rule is for active duty military members who are moving due to a change in duty station.
You can deduct personal casualty and theft losses only if they are related to a federally declared disaster. Each claim must include the FEMA code assigned to the disaster.
The deduction for charitable donations has gone up. You can now deduct cash contributions of up to 60% of your adjusted gross income. Before 2018, it was 50%.
For 2018 only, you can deduct unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income. Before, expenses had to exceed 10%. For 2019, this amount returns to 10% of your adjusted gross income.
Miscellaneous Itemized Expenses eliminated include
Employee business expenses
Investment expenses from pass-through entities
Safe deposit box fees
Job search expenses
Employment-related educational expenses
Investment expenses, including investment management fees
Tax preparation fees