The Tax Cuts and Jobs Act (TCJA) went into effect in 2018. This massive tax reform law contains many provisions affecting both individuals and businesses. The main provisions affecting individuals are summarized below. Except where otherwise noted, all of these changes are scheduled to expire on January 1, 2026, unless they are extended by Congress.
The TCJA keeps seven tax brackets with the lowest 10% bracket remaining the same. Other income tax rates have been reduced. There is a new 12% tax rate that covers more income than the 10% and 15% brackets under prior law, resulting in lower taxes for many middle-income households. At the highest end of the spectrum, the top tax rate is 37% instead of 39.6% under prior law. You have to have a substantial income to reach the top rate--for 2019, it applies only to married taxpayers with incomes over $612,350, and singles with incomes over $513,300.
The standard deduction, which reduces all individual taxpayers’ taxable income by a fixed amount, was roughly doubled by the TCJA. For 2019, the standard deduction is $12,200 for single individuals and $24,400 for marrieds filing jointly. Individuals whose taxable income is less than these amounts pay zero income tax.
The $4,050 per-household-member personal exemption was eliminated. Because of this, larger families may benefit little from the increase in the standard deduction.
The new tax law eliminates itemized deductions for:
Charitable contributions remain deductible by itemizers. People who itemize will be allowed to deduct cash contributions up to 60% of their adjusted gross income, instead of 50% under current law.
Fewer taxpayers will itemize their personal deductions because of the increase in the standard deduction: It's expected that only 12% of all taxpayers will itemized, compared with 30% under prior law.
Under the TCJA, the AGI threshold for deducting medical expenses was reduced from 10% to 7.5% for 2017 through 2018. The threshold went back to 10% of AGI starting in 2019.
The TCJA limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness, a reduction of $250,000 from prior law. The limit went into effect January 1, 2018 and applies only to homes purchased after December 15, 2017. Taxpayers with a binding written contract in place before December 15, 2017 who purchased a home before April 1, 2018, can continue to deduct up to $1 million in acquisition debt.
Before 2018, interest on up to $100,000 in home equity loans or lines of credit could be deducted by itemizers. The loan could be used for any purpose, such as paying off credit card debt or for a child's college education. The TCJA eliminated this $100,000 home equity loan deduction for 2018 through 2025. However, interest paid on a home equity loan or line of credit used to purchase, build, or improve a main or second home remains deductible. For example, you can still deduct the interest on a home equity loan you use to add a room to your home or make other improvements. Such a home equity loan counts towards the $750,000 or $1 million mortgage interest deduction loan limit and the interest is deductible only on loans up to the applicable limit.
The TCJA limits the state and local tax deduction to a total of $10,000. Under prior law, individuals who itemized were allowed to deduct the full amount of property tax and state and other local taxes they paid each year, including state income and sales tax.
The child tax credit was increased to $2,000 per child under 17, up from $1,000 per child. $1,400 of the credit is refundable, meaning you need owe no tax to receive the credit amount. The TCJA increased the phase out to over $200,000 for individual taxpayer income (up from $75,000) and over $400,000 income for marrieds (up from $110,000).
The TCJA also established a new $500 credit for each parent and nonchild dependent, such as college students.
The TCJA increased the amount of income exempt from the Alternative Minimum Tax by 39%. As a result, few taxpayers are subject to the AMT.
Under the TCJA, estates worth up $11 million per person are exempt from the federal estate tax, double the prior amount. This means that married couples with estates worth up to $22 million will not be affected by the federal estate tax.
Under prior law, alimony could be deducted by the ex-spouse who paid it and was taxable income for the receiving ex-spouse. The alimony deduction saved on taxes because the alimony-paying ex-spouse was usually in a higher tax bracket than the alimony-receiving ex-spouse. The TCJA eliminated this deduction starting in 2019. In addition, ex-spouses who receive alimony are not required to pay income tax on the payments. This change applies to all divorces or legal separations finalized January 1, 2019 or later. The old rules continue to apply to divorces finalized before January 1, 2019. The new rules will result in many alimony-paying ex-spouses owing more in income taxes.
The Affordable Care Act (popularly called Obamacare) required individuals to obtain minimally adequate health insurance for themselves and their dependents. Those that failed to comply had to pay a tax penalty to the IRS. The TCJA permanently eliminated this penalty starting in 2019, effectively making individual compliance with Obamacare purely voluntary. However, some states may impose their own individual health insurance mandates on state residents.
Effective date: January 1, 2018