How the Tax Cuts and Jobs Act will affect every day Americans
The Tax Cuts and Jobs Act (TCJA) was passed in 2017, bringing about the first major change in the US tax system in over 30 years. Taxpayers can take advantage of the TCJA’s sweeping changes to tax brackets, deductions, and credits. Below are the most notable changes that are expected to impact Americans when they file their tax returns this year.
Changes to tax brackets
Sweeping changes were made to individual taxpayer brackets. While the number of brackets remains the same, the tax rate for each bracket was reduced.
| 2018 – 2019 TAX BRACKETS | ||
| Single Filers | Married Filing Jointly | Tax Rate |
| $0 – $9,525 | $0 – $19,050 | 10% |
| $9,526 – $38,700 | $19,051 – $77,400 | 12% |
| $38,701 – $82,500 | $77,401 – $165,000 | 22% |
| $82,501 – $157,500 | $165,001 – $315,000 | 24% |
| $157,501 – $200,000 | $315,001 – $400,000 | 32% |
| $200,001 – $500,000 | $400,001 – $600,000 | 35% |
| $500,001+ | $600,001+ | 37% |
The TCJA also decreased the income thresholds for meeting the above brackets. For example, the new threshold for married joint filers to be eligible for the 10% tax bracket was raised to $19,050 for 2018, compared with $18,650 in prior years. For single filers, this was raised from $9,325 to $9,525 in 2018.
Standard deduction and personal exemptions
Some of the biggest changes under the TCJA impacting taxpayers can be found in the standard deduction and personal exemption allowances. The standard deduction was raised to $12,000 for individuals, $24,000 for married couples filing joint returns, and $18,000 for heads of household for the 2018 tax year. This is a significant jump over 2017, where the standard deductions were $6,350 for individuals, $12,700 for married couples filing joint returns, and $9,550 for those filing as heads of households.
However, the TCJA eliminated the use of personal exemptions in 2018. Years prior, personal exemptions allowed taxpayers to exempt a portion of taxable income per dependent. The personal exemption in 2017 was $4,050 per dependent.
Child tax credits
If you have children under the age of 17, the Child Tax Credit (CTC) has been increased to $2,000 in 2018, provided that you meet all requirements. Not only is the CTC deducted from income tax that is owed, it is now a refundable credit. This means that if the credit results in an overpayment of taxes, you can now receive a refund of up to $1,400 per qualified child.
New under the TCJA is a $500 credit for dependent children between the ages of 17 and 23, as well as other dependent family members, who live in your home.
On the surface, it appears that smaller families and married couples without children will benefit from such changes, whereas larger families with dependent children will see reduced deductions on their returns. However, lower tax brackets and rates, as well as the increased child tax credit are designed to offset the changes in deductions and exemptions.
State and local taxes
For taxpayers that have historically itemized their deductions, payments made for state and local taxes (SALT) were fully deductible on Schedule A. SALT includes such taxes as state and local income tax, property tax, and sales tax. Starting January 1, 2018, the deduction for SALT is limited to $10,000. Taxpayers who itemize and live in states that charge higher taxes may feel the impact of this change. However, with the increase in the standard deduction, many taxpayers may choose to go that route.
Impact on homeowners
Homeowners can expect to see changes when they file their 2018 tax returns. These include:
Mortgage Interest – For homes that were purchased after December 31, 2017, homeowners may deduct up to $750,000 of mortgage interest or $375,000 each if married, filing separately. The mortgage interest deduction on homes that were purchased on or before December 31, 2017 may continue to be deducted up to $1 million, or $500,000 if married, filing separately.
Home Equity Loan– Regardless of when the home equity loan or line was entered into, interest paid can no longer be deducted, effective January 1, 2018.
Mortgage Insurance Premiums – This deduction is no longer available to homeowners, as it expired on December 31, 2017.
Impact on Investment Property Owners
The TCJA brought about changes for owners of investment properties as well. These include the pass-through income deduction and changes to depreciation deductions.
Pass-through income deduction– A new deduction, based on 20% of qualified business income (QBI), is eligible for pass-through entities such as partnerships, S Corporations, and sole proprietorships. The calculation of QBI is determined based on the net income of a business, subject to various limitations, such as W2 wages and business interest. However, the QBI deduction will not apply to certain service businesses.
Personal property depreciation deductions- Some exciting changes for investment property owners can be found under Section 179, which allows qualified personal property to be deducted in the year of purchase. Not only was the threshold for deduction was raised to $1 million in 2018, the phase-out level was raised to $2.5 million. The deduction was expanded to include personal property used in residential rental units, which previously had not been available to rental property owners. Furniture, appliances, and other equipment are now eligible for the deduction.
Section 179 deductions are limited, however, in that it cannot create or contribute to an overall tax loss. With that in mind, the bonus depreciation deduction has been expanded and now covers 100% of personal property, whether it is new or used. This deduction will apply to assets placed in service between September 18, 2017 and December 31, 2022.
Effective January 1, 2023, the bonus depreciation adjustment will drop to 80% and will continue to decrease to 60% in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation, unlike the Sec 179 deduction, is not subject to a limitation of taxable income, therefore it can create or contribute to a net loss.
The TCJA brings a myriad of changes. If you are a homeowner or hold investment properties, the TCJA can provide many opportunities for tax relief.
Seeking the services of qualified real estate and tax professionals can help you to plan for that future purchase or improvements.
