Other 2018 Tax Law Changes

The New 2018 tax brackets

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $300,000

DATA SOURCE: JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE.

Standard deduction and personal exemption

While it’s being sold as a tax cut, the higher standard deduction really falls more under the category of a simplification.

Yes, the standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated. For example, a single filer would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption in 2018, for a total of $10,650 in income exclusions. Under the new tax plan, they would just get a $12,000 standard deduction. Is it better? Yes. But it’s not really “doubled.”

Having said that, here’s a comparison between the standard deductions of the new and old tax laws.

Tax Filing Status Previous Standard Deduction (Set to take effect in 2018) New Standard Deduction
Single $6,500 $12,000
Married Filing Jointly $13,000 $24,000
Married Filing Separately $6,500 $12,000
Head of Household $9,350 $18,000

DATA SOURCE: IRS AND TAX CUTS AND JOBS ACT.

Capital gains taxes

The general structure of the capital gains tax system, which applies to things like stock sales and sales of other appreciated assets, isn’t changing.

Short-term capital gains are still taxed as ordinary income. Since the tax brackets applied to ordinary income have changed significantly, as you can see from the charts above, your short-term gains are likely taxed at a different rate than they formerly were.

Also, under the new tax law, the three capital gains income thresholds don’t match up perfectly with the tax brackets. Under previous tax law, a 0% long-term capital gains tax rate applied to individuals in the two lowest marginal tax brackets, a 15% rate applied to the next four, and a 20% capital gains tax rate applied to the top tax bracket.

Instead of this type of structure, the long-term capital gains tax rate income thresholds are similar to where they would have been under the old tax law. For 2018, they are applied to maximum taxable income levels as follows:

Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly Head of Household Married Filing Separately
0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
15% $38,600-$425,800 $77,200-$479,000 $51,700-$452,400 $38,600-$239,500
20% Over $425,800 Over $479,000 Over $452,400 Over $239,500

DATA SOURCE: TAX CUTS AND JOBS ACT.

Finally, the 3.8% net investment income tax that applied to high earners remains the same and with the exact same income thresholds.

Tax breaks for parents

The Child Tax Credit, which is available for qualified children under age 17, doubles from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400.

In addition, the phaseout threshold for the credit is dramatically increasing.

Tax Filing Status Old Phaseout Threshold New Phaseout Threshold
Married Filing Jointly $110,000 $400,000
Individuals $75,000 $200,000

DATA SOURCE: TAX CUTS AND JOBS ACT.

If your children are 17 or older, or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.

Furthermore, the Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can’t use both of these breaks to cover the same child care costs, but with the annual cost of child care well over $20,000 per year for two children in many areas, it’s safe to say that many parents can take advantage of the FSA and credit, both of which remain in place.

Education tax breaks

The Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well.

One significant change is that the bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college. In other words, if you have children in private school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in your account for these expenses.

Mortgage interest, charitable contributions, and medical expenses

These three deductions remain, but there have been slight tweaks made to each.

  • First, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, down from $1 million currently. This only applies to mortgages taken after Dec. 15, 2017, preexisting mortgages are grandfathered in. And the interest on home equity debt can no longer be deducted at all, whereas up to $100,000 in home equity debt could be considered.
  • Next, the charitable contribution deduction is almost the same, but with two notable changes. First, taxpayers can deduct donations of as much as 60% of their income, up from a 50% cap. And donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
  • Finally, the threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. In other words, if your adjusted gross income is $50,000, you can now deduct any unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law. Unlike most other provisions in the bill, this is retroactive to the 2017 tax year.

The State and Local Tax deduction

The new rule limits the total deductible amount to $10,000, including income, sales, and property taxes.

Deductions that are disappearing

While many deductions are remaining under the new tax law, there are several that didn’t survive, in addition to those already mentioned elsewhere in this guide. Gone for the 2018 tax year are the deductions for:

  • Casualty and theft losses (except those attributable to a federally declared disaster)
  • Unreimbursed employee expenses
  • Tax preparation expenses
  • Other miscellaneous deductions previously subject to the 2% AGI cap
  • Moving expenses
  • Employer-subsidized parking and transportation reimbursement

Obamacare penalties will be going away

The tax reform bill repeals the individual mandate, meaning that people who don’t buy health insurance will no longer have to pay a tax penalty.

This change doesn’t go into effect until 2019, so for 2018, the “Obamacare penalty” can still be assessed.

Alternative minimum tax, version 2.0

The tax reform bill permanently adjusts the AMT exemption amounts for inflation in order to address this problem, and makes them significantly higher initially in 2018. Here’s how the AMT exemptions are changing for 2018.

Tax Filing Status 2017 AMT Exemption Amount 2018 AMT Exemption Amount
Single or Head of Household $54,300 $70,300
Married Filing Jointly $84,500 $109,400
Married Filing Separately $42,250 $54,700

DATA SOURCE: TAX CUTS AND JOBS ACT.

In addition, the income thresholds at which the exemption amounts begin to phase out are dramatically increased. Currently, these are set at $160,900 for joint filers and $120,700 for individuals, but the new law raises these to $1 million and $500,000, respectively.

The estate tax exemption

The new tax law doubled the current exemption. Now, for 2018, individuals get a $11.2 million lifetime exemption and married couples get to exclude $22.4 million.

Most of the individual tax breaks are temporary

It’s also important to point out that most of the changes to individual taxes made by the bill are temporary — they’re set to expire after the 2025 tax year.

Corporate tax rates

The bill lowers the corporate tax rate to a flat 21% on all profits for C-corporations.

In addition to these changes, the corporate AMT of 20% has been repealed.