Taxes have been in the news a lot lately. What changes should I expect from the tax bill Congress recently passed?
Here is a brief overview of the Tax Cuts and Jobs Act passed by Congress. President Trump signed the bill into law on Dec. 22, 2017, and the changes will become effective in early 2018.
Tax brackets. The bill preserves seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Previous rates were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Here's how much income applies to the new rates:
- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
- 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
- 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
- 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
- 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
- 37% (over $500,000; over $600,000 for couples).
Note: The majority of individual income tax changes are temporary, expiring Dec. 31, 2025.
Deductions. The new bill nearly doubles the standard deduction. For single filers, the bill increases the deduction to $12,000 from $6,350; for married couples filing jointly, it increases to $24,000 from $12,700. However, it eliminates personal exemptions. Previously, you were allowed to claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents. Claiming these exemptions lowered your taxable income and thus your tax burden in the past.
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The bill preserves the state and local tax deduction for anyone who itemizes, but caps the amount that may be deducted at $10,000. Before, the deduction was unlimited for your state and local property taxes plus income or sales taxes.
Child tax credit. The new law doubles the child tax credit. The new credit is $2,000 for children under 17 years of age. The credit is also made available to higher earners by raising the income threshold under which filers may claim the full credit to $200,000 for single parents and $400,000 for married couples. These income thresholds stood at $75,000 and $110,000 respectively in previous years.
Affordable Care Act individual mandate. The Affordable Care Act individual mandate is repealed beginning in 2019.
Mortgage interest deductions. The law lowers the cap on mortgage interest deductions. If you take out a new mortgage on a first or second home, you will only be allowed to deduct the interest on debt up to $750,000, down from $1 million. Homeowners who already have a mortgage would be unaffected by the change.