The changes involve many parts of the tax code, so how the tax bill affects you depends on your personal situation, how many children you have, how much you pay in mortgage interest and state/local taxes, and how much you earn.
If you live in a high-tax area, you will be especially affected by the new $10,000 limit on state and local tax payments (including property taxes) that you can deduct from your federal income taxes (exempted: taxes that are paid or accrued through doing a business or trade).
Your current mortgage-interest deductions won't be affected, but if you move, that will change (see next section). Fewer people will itemize since the deduction will increase from $6,350 to $12,000 for individuals. For married couples filing separately, from $9,350 to $18,000 for heads of household, and from $12,700 to $24,000 for married couples filing jointly. Homeowners also won’t be able to deduct the interest on home-equity loans, whether they itemize or not.
Buying or Selling a Home
Under current law, homeowners can deduct the interest on a mortgage of up to $1,000,000, or $500,000 for married taxpayers filing separately. Now, anyone who takes out a mortgage between December 15, 2017, and December 31, 2025, can only deduct interest on a mortgage of up to $750,000, or $375,000 for married taxpayers filing separately.
You Itemize and File Schedule A
The standard deduction has increased from $6,350 to $12,000 for individuals and for married couples filing separately, from $9,350 to $18,000 for heads of household, and from $12,700 to $24,000 for married couples filing jointly.
This change means many households that used to itemize their deductions using Schedule A will now take the standard deduction instead, simplifying tax preparation for an estimated 30 million Americans, according to USA Today. The Joint Committee on Taxation estimates that 94 percent of taxpayers will claim the standard deduction starting in 2018; about 70 percent claim the standard deduction under current law. Not filing schedule A means less record keeping and less tax-prep time. It also means charitable contributions will effectively no longer be tax deductible for many taxpayers because they won’t itemize.
Taxpayers who continue to itemize need to be aware of changes to many Schedule A items beginning with the 2018 tax year.
- Casualty and Theft Losses
These are no longer tax deductible unless they are related to a loss in a federally declared disaster area, i.e. hurricanes, floods, fires, tornados…etc.
- Medical Expenses
The threshold for deducting medical expenses temporarily goes back to 7.5% from 10%, and that change applies to 2017 taxes, unlike the bill’s other changes, which mostly don’t kick in until 2018. But the change only applies through 2019. After that, the 10% threshold returns. This change particularly helps those with low incomes and high medical expenses. If your adjusted gross income is $50,000, you’ll be able to deduct medical expenses that exceed $3,750. So if you paid $5,000 in medical expenses and you’re itemizing using Schedule A, you’ll be eligible to deduct $1,250 of your $5,000 in medical expenses.
- State and local taxes
Taxpayers can deduct a maximum of $10,000 from the total of their state and local income taxes or sales taxes, and their property taxes (added together), a measure that might hurt itemizers in high-tax states such as California, New York and New Jersey. The $10,000 cap applies whether you are single or married filing jointly; if you are married filing separately, it drops to $5,000.
- Eliminated Miscellaneous Deductions
Taxpayers lose the ability to deduct the cost of tax preparation, investment fees, bike commuting ($20/month), not reimbursed job expenses, and moving expenses as they can no longer be itemized.
How Will Your Tax Bracket Change?
That depends. Tax rates are changing from 2018 through 2025 across the income spectrum. In 2026, the changes will expire and current rates will return, absent further legislation, though the tax brackets will have changed slightly due to inflation. The individual cuts were not made permanent. The reason given: their effect on increasing the budget deficit.
The Tax Policy Center projects that everyone, on average, will save money from the tax-bracket changes. In 2018, the fourth quintile and the top 80%–95% of income earners will receive an average tax cut of about 2%. The top 95%–99% are the biggest winners, with an average tax cut of about 4%. The top 1% will see an average tax cut of a little less than 3.5%, while the top 0.1% will receive an average tax cut of a little more than 2.5%.
The new tax brackets eliminate the marriage penalty. The income brackets that apply to each marginal tax rate for married couples filing jointly are exactly double those for singles. Previously, some couples found themselves in a higher tax bracket after marriage.
The Tax Policy Center’s analysis shows that the biggest benefits will go to households earning $308,000 to $733,000. Those who earn more than $733,000 can expect a $50,000 tax cut.
Note that the top 20% pay nearly 87% of all the federal income tax the government collects, according to the Tax Policy Center. The top 1% pay more than 43% of it, and the top 0.1% pay more than 20% of it.
In 2018, according to the Tax Policy Center, the second quintile of income earners will get an average tax cut of a little over 1%. The third quintile will get an average tax cut of about 1.5%. Overall, middle income families can expect to save an average of $900 in taxes.
The Tax Policy Center estimates that almost half of low-income households will not see their tax liability changed under the tax bill. And it estimates that in 2018, the lowest quintile of income earners would get an average tax cut of less than 0.5%, while the second quintile will get an average tax cut of a little over 1%.
Note that many in the lowest brackets don’t earn enough to owe federal income tax. The Tax Policy Center says that the lowest 20% of income earners get 2.2% back in total federal income taxes paid each year, with an average tax bill of –$643. The second lowest 20% are in a similar situation. However, lower-income workers still pay Social Security and Medicare taxes, even if they don’t always pay federal income taxes.
The tax bill will affect us all from 2018 through 2025 and beyond. It will change how much money is in our bank accounts after each time we get paid and after we file our taxes each year. Some of us will have lower tax bills and be able to pay off our debts faster or put more money in our retirement accounts while some of us will have higher tax bills and we might have a harder time making ends meet or saving for the future.
As always, specific questions about your taxes and finances should be directed to a tax professional or financial advisor. If you are ready to file yourself, you can save $15 on TurboTax services as a Solidarity member!
File through this link: TurboTax for Solidarity Members
File through this link: TurboTax for Solidarity Members
*We’d like to remind our members to verify their account number when filing their taxes so the refund will not be delayed or returned for a bad account number.