You may have even noticed a higher paycheck in the last year as a result of these tax changes. From tax rates to deduction allowances, tax reform is enough to make anyone’s head spin. So, we’ve broken the major changes down for you in simple (or as simple as they can get) terms.
Lower Marginal Tax Rates The percentage of your income that you will pay in taxes and is based on your income range, also known as a tax bracket. Each range will pay a specific percentage. For majority of Americans, marginal tax rates will be lower this year! Check your 2018 tax bracket here.
Standard Deduction Increase The standard deduction is the automatic reduction in what you owe in taxes. When you file your taxes, you can choose to either take the standard deduction or itemize your deductions. If you itemize, each item must be calculated individually, and it is much more of a hassle, not to mention a lot of receipts to keep up with all year. However, it may be worth it if your total deductions are significantly higher than the standard deduction. No matter your filing status, the standard deduction increased in 2018. In fact, it almost doubled!
Personal Exemption Eliminated This is the amount a taxpayer used to be able to deduct from taxable income for themselves and any dependents claimed on their tax return. As of 2018, taxpayers can no longer claim the $4,050 personal exemption for each of their dependents (like a child or relative).
To accurately determine how the changes to standard deductions and personal exemptions will affect you, consider this example: In 2017, a married couple filing jointly who made $100,000 received a standard deduction of $12,700 and $8,100 in personal exemptions, leaving them with a taxable income of $79,200. In 2018, the same couple will receive the $24,000 standard deduction, leaving them with a taxable income of $76,000, $3,200 less than in 2017.
Child Tax Credit Increased For each child, the tax credit has increased from $1,000 to $2,000. In 2017, if parents made less than $110,000 jointly/$75,000 individually, they received a $1,000 tax credit per child under the age of 17. The 2018 bill increases that to $2,000 per child and raises the income limits to $400,00 jointly/$200,000 individually. This means a lot more Americans will receive a tax credit for their little ones! The new tax law also includes a new $500 credit for non-child dependents.
Mortgage Deductions In 2017, if you itemized your deductions, the IRS allowed you to deduct the interest you paid on your mortgage, so long as the mortgage principal wasn’t more than $1 million. In 2018, the mortgage principal amount is lowered to $750,000. However, it’s good to note that anyone with an existing mortgage between $750,000 and $1 million will be grandfathered into the old deduction allowance.
Another big change to taxes related to your home is that interest paid on a home equity line of credit (HELOC) is no longer deductible. Before this year, homeowners could deduct interest paid on a home equity debt up to $100,000.
State and Local Taxes Capped The SALT (state and local taxes) deduction addresses state/local income, sales and property taxes when deductions are itemized. In previous tax laws, there was no cap on the amount you could deduct which was a particular advantage to those living in high-tax states like California and New York. The new tax bill keeps SALT deduction but caps them at $10,000, which includes all income, sales and property taxes.
In summary, each tax situation is unique and the overall effects these changes have will vary from household to household. Please consult your tax advisor with any specific questions on tax reform and your refund.