On December 2017, President Donald Trump signed the new tax reform law called Tax Cuts and Jobs Act. Early on, the Republicans in the House and Senate passed the $1.5 trillion tax bill. The Byrd Rule gave it a different name. It was “an act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” It sounds complex, but in reality, it’s not. People can also call it in its simpler form. It also retained many IRS rules, save for some. These changes can affect you as a taxpayer or business owner once you file next year. Below are the important changes you need to remember.
In this article:
- Standard Deductions
- ACA Individual Mandate
- Child Tax Credit
- Personal Exemptions
- State and Local Tax (SALT) Cap
- Mortgage and Home Equity Loan Interest Deduction
- Student Loan Debt Discharge
New Tax Reform | The Big Changes to Expect in Your Next Income Tax Return
Adjusted Gross Income Definition: It refers to the difference between the total income and the specific adjustments you can deduct directly to it. These deductions can include alimony. The AGI is a basis for many types of standard and itemized deductions and other tax benefits. It may make you eligible or not. It can also limit how much you can claim.
One of the significant changes introduced by the new tax reform are the standard deductions. Taxpayers who do not itemize deductions need to claim the standard deductions. The previous amounts were as follows:
- $6,350 for single individuals
- $9,350 for heads of household
- $12,700 for a married couple filing jointly
Under the new tax reform plan, the figures almost doubled. It’s now $12,000 for single individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly.
ACA Individual Mandate
The Affordable Care Act (ACA) used to require both U.S. citizens and non-citizens with a legal residence to have health insurance. Under this rule, people who opted not to buy coverage could face a tax penalty dependent on income.
Starting on January 1, 2019, the tax reform will remove the penalties. The GOP lawmakers claim the measure will decrease spending on tax subsidies. These are amounts that cover the cost of premiums for ACA enrollees. Experts, though, have warned of a problem. It might lead to fewer young and healthy people signing up for coverage. It might then increase the premium for those who remain in the marketplace.
Child Tax Credit
Under the old rule, taxpayers could claim a child tax credit of $1,000 per child under the age of 17. It then decreased by $50 for every $1,000 a taxpayer earns over specific thresholds.
These thresholds began at a modified adjusted gross income (AGI) over $75,000 for single individuals. It was $110,000 for married couples filing jointly and $55,000 for married couples filing separately.
The new tax reform in 2018 doubles the child tax credit. Up to $1,400 of this can go toward a tax refund. A $500 non-refundable tax credit per dependent can also apply to a dependent other than a qualifying child. The credit will begin to phase out for AGI over $400,000 for married couples. The threshold for single taxpayers is AGI over $200,000.
The law suspends personal exemptions until 2025. Before, taxpayers could reduce their AGI by claiming personal exemptions. They could apply them for themselves, their spouse, and/or their dependents. The amount was $4,050 for each exemption. The new tax law removed it for households earning more than the specified AGI thresholds:
- Over $313,800 for married couples filing jointly
- More than $287,650 for heads of household
- Over $156,900 for married couples filing separately
All other taxpayers can lose the exemption once they reach $261,500 AGI.
State and Local Tax (SALT) Cap
Before, taxpayers could include state and local property taxes as itemized deductions. They could do the same with sales taxes and income. The new law capped the amount to only $10,000 for all the aforementioned deductions from 2018 to 2025. The rule also discourages taxpayers from dodging these new limitations. Some might choose to prepay their 2018 state and local income taxes in 2017. The bill, though, does not mention anything about prepaying 2018 property taxes.
Mortgage and Home Equity Loan Interest Deduction
Homeowners can deduct interest paid on mortgages up to $1 million on a primary home and another qualifying residence. They can also claim an itemized deduction for the interest on a home equity loan or home equity line of credit. The limit is $100,000.
The new tax reform states homeowners can claim the mortgage interest paid on up to $750,000 of the principal value on a new home as an itemized deduction. The previous $1 million cap will still apply to property owners who took out their mortgages on or before December 15, 2017. This is along with refinancing on mortgages taken out during the same period. It is applicable only when the mortgage is not higher than the refinanced debt. Homeowners cannot deduct the interest paid on a home equity loan or home equity line of credit if they used the debt to increase the value of the home. These rules might change after 2025.
Student Loan Debt Discharge
Students can discharge their debts in specific cases. These can include death or disability. In the previous tax law, the forgiven amount was taxable as ordinary income. The new tax reform changes that. It became tax-free on January 1, 2018. This rule will remain through 2025.
When will the new tax reform take effect? People are wondering about that. The good news is not all these changes will apply this upcoming year. You’ll have some time to make changes to your tax situation. Either way, if you’re a taxpayer, start planning now. This way, you’ll be ready for a big payout by 2020.
What do you think of the provisions of the new tax reform law? Share your thoughts below!