After much anticipation, President Trump signed the new tax bill on December 22, 2017. The new tax bill is the most comprehensive tax bill since 1986 and will have a sweeping effect on individuals and businesses.
In part one of this blog, I've outlined the top 11 changes that will affect individual taxpayers:
- Personal income tax will now be divided into seven tax rate brackets—10%, 12%, 22%, 24%, 32%, 35%, and 37%. Previously, individuals were subject to six tax rates—10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
- Standard deduction will now be $24,000 for married individuals filing jointly, $18,000 for head-of-household filers, and $12,000 for all other taxpayers. This has increased from the previous standard deduction of $13,000 for married individuals filing jointly, $9,500 for heads of household, and $6,500 for single individuals and married individuals filing separately.
- Personal exemptions have been suspended, with the amount deductible for personal exemptions reduced to zero. Previously, taxpayers were eligible to deduct up to $4,150 for personal exemptions.
- Child tax credit has been increased to $2,000, with the income level for phase-out being increased to $400,000 for married individuals filing jointly, and $200,000 for all other taxpayers. Previously, a taxpayer could claim up to $1,000 per qualifying child, which phased out by $50 for each $1,000 of annual gross income over $75,000 for single filers, $110,000 for married individuals filing jointly, and $55,000 for married individuals filing separately.
- Home equity indebtedness interest deduction has been suspended, and the deduction for mortgage interest will now be limited to underlying debt up to $750,000, or $375,000 for married individuals filing separately. For mortgages obtained before December 15, 2017, the new law allows homeowners to keep the old limitation of $1 million of indebtedness.
- Medical expense deductions have been reduced to a threshold of 7.5% for all taxpayers.
- Alimony and maintenance payments are no longer deductible by the paying spouse, and are no longer included in the income of the receiving spouse. Income used for alimony will now be taxed at the tax rate applicable to the paying spouse. These changes will apply to any divorce or separation agreements executed or updated after December 31, 2018.
- Miscellaneous itemized deductions have been suspended. Previously, taxpayers were allowed to deduct certain miscellaneous itemized expenses if they exceeded 2% of the taxpayers adjusted gross income.
- Alternative Minimum Tax will have higher exemption amounts—from $86,200 to $109,400 for joint returns and surviving spouses; from $55,400 to $70,300 for single taxpayers, and from $43,100 to $54,700 for married individuals filing separately.
- 529 account funds previously had to be used only for qualified higher education expenses. Now, "qualified expenses" have been expanded to also include tuition at an elementary or secondary public, private, or religious school, and various expenses associated with home school, up to a $10,000 limit per tax year.
- Estate and gift tax base exemption amount has been doubled. Previously, the first $5.6 million of transferred property was exempt from estate and gift tax ($11.2 million for married couples). Now, this basic exemption amount is $11.2 million ($22.4 million for married couples).
Stay tuned for part two, where I'll discuss the impact that the new tax laws will have on businesses! If you have any questions on how Trump's tax overhaul will impact you, please feel free to contact me directly, or leave a comment below.