The tax law changes passed at the end of 2017 were the most sweeping in three decades. You will feel the impact when you file your return in 2019. Here are four major provisions that will probably affect you the most.
New Tax Brackets
The number of tax brackets remains the same at seven, but the percentage rates are generally lower by one to three percent. Only the bottom bracket and the next to highest remain unchanged at 10 percent and 35 percent. The income limits for each bracket also adjust.
The new law provides for those income levels to adjust periodically for inflation to prevent “bracket creep”. This prevents tax payers from rising to the next tax bracket percentage just because of inflation rather than a real rise in income, which was a key complaint of tax payers during the high inflation 1970s.
The Personal Exemption is Gone
The personal exemption per individual had been $4,050. This has been removed entirely. This take away has been offset by a dramatic increase in the standard deduction amounts.
Big Changes to the Standard and Itemized Deductions
The standard deduction has almost doubled for everyone. It was $6,500 for individuals and $13,000 for married couples filing jointly. Now it is $12,000 and $24,000 respectively. For some filers their itemized deductions may no longer be a clear choice over filing the standard deduction.
Filers who are 65 or older are eligible to add to the standard deduction $1,300 if married and $1,600 for singles. So a couple both of whom are 65 or older receive a total standard deduction of $26,600.
A very important change to itemized deductions is the new cap set on the amount of state and local taxes the filer can claim. Previously, property taxes, state sales taxes and state income taxes could be claimed in full on the Schedule A form for itemizing. This was available even if the filer owned more than one property. Now there is a $10,000 cap, period. This will put a squeeze on filers in states with high property or state income taxes and/or who own more than one house. It may make more sense to file the standard deductions and also to sell off additional properties owned.
One important provision that improved temporarily is the deduction for out of pocket medical expenses. Filers had been able to claim expenses in excess of 10 percent of adjusted gross income. For 2017 and 2018 that threshold has been reduced to 7.5 percent. This is particularly important to seniors since the vast majority of most people’s medical expenses come in the latter years of life. The threshold returns to 10 percent for the 2019 tax year.
More Generous Child Tax Credits
Previously the child tax credit was $1,000 per qualifying child, was refundable on income starting as low as $3,000 and began phasing out at $75,000 of adjusted gross income for single filers, $110,000 for married filing jointly. The child must be 17 at the end of the year being filed, among other qualifiers.
Under the new law the credit expands to $2,000 per child, the age 17 rule remains, the earned income threshold drops to $2,500 and the income limit phase out begins at $200,000 for singles, $400,000 joint filers.
Expanded Estate Tax Exemption
The value of an estate that can be passed to heirs tax free doubled from $5.5 million for individuals and $11 million if married to $11 million and $22 million respectively. These amounts can be bequeathed to the heirs at death or given away steadily over the years prior.
For the heir, the step up basis rule remains the same. This rule says that when an heir inherits an asset that increases in value, capital gains are only counted from the date that the heir inherited the asset, not from the date of acquisition by the person handing it down.