Lower Income Tax Rates for Most Individuals
The 2017 Tax Cuts and Job Act (TCJA) is the biggest change that the US has seen in regard to tax law in decades. Prior to the TCJA being signed into law last year, the biggest change the tax law underwent was when the Tax Reform Act of 1986 was approved.
In short, the new tax law gives lower income tax rates to most individuals. Along with this change, individuals should also be aware of the items that are being eliminated by the new law.
Prior to the TCJA, individuals were allowed a personal exemption for themselves, their spouses, and anyone else that they claimed to reduce taxable income. Along with personal exemptions, individuals were also able to itemize their deductions or take the standard deduction to further reduce taxable income.
Personal Exemptions Eliminated
The TCJA eliminates personal exemptions, and eliminates or limits certain itemized deductions commonly deducted on many taxpayers tax returns. New limitations apply to certain itemized deductions, including:
- a $10,000 limitation on the state and local taxes paid deduction
- a reduced cap of $750,000 on the amount of mortgage debt on newly purchased homes for which interest may be deducted
Fully Eliminated Deductions
Fully eliminated were miscellaneous itemized deductions, which included deductions for job-related expenses such as mileage, meals, home office supplies, and union dues; other miscellaneous deductions included legal fees, tax preparation fees, and financial management fees.
The TCJA provides relief for the elimination of or limitations on the personal exemption and itemized deductions in a couple ways. As mentioned above, the new tax law reduces tax rates on individuals.This means that individuals who remain in the same tax income bracket from 2017 to 2018 will likely pay less in federal tax in 2018 than in 2017.
Standard Deduction Increase
In addition to the lower tax rates, taxpayers will also see an increase in standard deduction; in 2017, the standard deduction was $6,350 for singles and married couples filing separately, $9,350 for heads of households, and $12,700 for married couples filing jointly.
The TCJA increases the standard deduction to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.
Child Tax Credit Increase
Finally, the TCJA doubles the child tax credit from $2,000 to $4,000 per child, increases the income threshold for phaseout of the credit, and increases the amount of the credit considered to be refundable.
These changes will help offset the elimination of the personal exemptions and certain itemized deductions, and in many cases, even provide tax savings for individuals.
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