The Tax Cuts and Jobs Act enhances and creates numerous tax breaks for individual taxpayers, but repeals or scales back a slew of others.
Although the provisions for individuals are generally effective in 2018, most are scheduled to sunset after 2025. It’s going to take time to sort out all the details, but here are 5 key items on the agenda.
1. Cash in on tax cut bonanza. The new law revamps the individual tax rate structure by reducing rates and expanding brackets for upper income taxpayers. Previously, the seven tax rates for individuals were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Under the TCJA, the new rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
In addition, the new tax law changes the Consumer Price Index used for inflation adjustments,
producing smaller inflation adjustments than before.
2. Embrace the standard deduction. When you file your personal tax return, you have a choice between claiming the standard deduction and itemizing deductions. Now the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers on 2018 returns. It also preserves the additional standard deductions for the elderly and blind.
Due to the higher standard deduction and related changes, such as the elimination and cutbacks of certain itemized deductions, more upper-income taxpayers are likely to claim the standard deduction for 2018. The increase in the standard deduction is offset somewhat by the loss of personal and dependent deductions.
3. Don’t take it personally. Previously, you could claim a personal exemption for yourself, your spouse (if married) and each of your qualified dependent children or qualifying relatives. Each exemption was scheduled to be $4,100 in 2018. Now the new law eliminates all personal exemptions, including those for dependent children and relatives.
In conjunction with this change, the personal exemption phaseout rule for higher income taxpayers is repealed.
4. Keep it all in the family. The new law doubles the child tax credit for each qualifying child from $1,000 to $2,000. Of this amount $1,400 is “refundable” under a late amendment to the law. The Tax Cuts and Jobs Act also creates a new $500 credit for nonchild dependents.
Existing credits for adoption expenses and dependent care expenses are retained. The new nonchild dependent credit isn’t available if you claim the Child Tax Credit.
5. Give ‘til it hurts. If you expect to itemize on your 2018 return, despite the aforementioned changes, you can still benefit from the deduction for charitable donations. Generally, this deduction remains intact, although the new law did make these modifications:
• Previously, the annual deduction for cash donations to public charities was limited to 50% of adjusted gross income. The Tax Cuts and Jobs Act increases this limit to 60% of adjusted gross income.
• The tax rule allowing donors to deduct 80% of the cost of donations paid to obtain the right to preferred seating at college athletic events is repealed.
• Substantiation requirements for cash gifts were relaxed if a charity provided the requisite information to the IRS. This exception no longer applies. When appropriate, continue donating appreciated property to maximize your deduction.