Highlights of the 2018 Tax Reform

In December of 2017, President Trump signed into law a bill which was originally titled the ‘Tax Cuts and Jobs Act’, but which underwent a name change during its journey through Congress. It is considered to be the most comprehensive change to tax laws in more than three decades, and most of its provisions went into effect as of January 1, 2018, while a few were deferred until January 1, 2019. The highlights of those changes are described below.

529 College Savings

Formerly, a tax-free 529 savings account could only be used toward expenses for college, but under the new law, it can now also be used for private Kindergarten through Grade 12 schooling as well. As much as $10,000 per year can be withdrawn from the account to cover the costs of education.

Affordable Care Act (ACA) insurance mandate

Up until 2018, all individuals were required to have health insurance unless you were exempt; otherwise tax penalties would be imposed by the government. As of January 1, 2019 no further penalties will be imposed on individuals lacking health insurance.

Alimony payments

In the past, a divorced person making alimony payments could claim them as deductions on their taxes, while the person receiving those payments had to declare them as income. Neither situation will continue for divorces which occur after January 1, 2019 – the payer cannot claim them as deductions, and the payee does not declare them as income.

Commuting by bicycle

Previously, bicycle commuters could deduct $20 per month from their gross income for bike expenses, such as a new bike purchase, replacement parts, and maintenance, but that is now suspended at least through the year 2025. 

Child tax credit

The new credit for child tax is doubled to $2,000 per qualifying child, and as much as $1,400 of that amount can be received as part of your tax refund.

Corporate tax schedule

The previously used tax schedule for corporate taxes called for a maximum rate of 35% to be imposed on taxable income which exceeded $10 million, but the new schedule reduces that ceiling to 21%.

Estate taxes

This is a tax imposed on large estates that are bequeathed to heirs, if the value of the estate is at $5.5 million or above. That exemption range has been doubled, so that the estate tax is not imposed unless the estate value is at least $11.2 million.

Earnings from home sales

Formerly homeowners were allowed to exclude earnings from home sales at a rate of $250,000 if filing singly and $500,000 if filing jointly, and the home had to be the primary residence for at least 2 of the 5 years prior to the sale. Under the new law, the exempt amounts are the same, but the residential window has been expanded to be 5 of the 8 years prior to sale.

Medical expenses

In the past, individuals were allowed to deduct medical expenses when they exceeded 10% of adjusted gross income (AGI), or if they exceeded 7.5% of adjusted gross income and your age is at least 65. This has been changed so that all medical expenses can be deducted when they exceed 7.5% of AGI, regardless of your age. 

Miscellaneous deductions

Under the new law, several miscellaneous tax deductions have been suspended, including tax preparation expenses, those expenses related to work, and those associated with investment fees.

Mortgage interest deduction

New homeowners can deduct mortgage interest payments on homes valued at $750,000 or less, as opposed to the $1 million cap previously in effect. Deductions can also be taken now for home equity loans which were used to make significant improvements to the home.

Moving expenses

Until now, homeowners could deduct moving expenses as long as the distance covered in the move met certain requirements, and the job at the new location was a full-time job. This moving expense deduction has been completely suspended, at least through 2025.

Pass-through business taxes

Companies which have ‘pass-through’ status, i.e. sole proprietorships, partnerships, LLC’s, and S Corporations, formerly had to claim all business income  on their personal tax forms. Under the new law, up to 20% of business income can be deducted on the personal tax form.

Personal casualty deduction

Previously, individuals were allowed to deduct losses of at least $100 when property was lost or destroyed during some kind of natural disaster such as an earthquake, fire, hurricane, or flood. The new law requires that qualifying disasters must be declared as national disasters by the government.

Personal exemptions

The personal exemptions claimed by head of household, spouse, and dependents are all eliminated as of January 1, 2018, and are considered to be suspended through at least 2025.

Standard deductions

Anyone who did not itemize their tax deductions was formerly allowed to claim the standard deduction, which was $6,350 for singles, $9,350 for head of household, and $12,700 for married individuals. The standard deductions are altered to be: $12,000 for singles, $18,000 for head of household, and $24,000 for married individuals.

State and local taxes

Whereas formerly filers could claim deductions on income from state and local properties, you can now only claim a maximum of $10,000 on all combined income from these areas.

Student loan discharge

Formerly, all student loans discharged as a result of disability or death were taxed as income, and this provision has been eliminated in the new tax law. As with many other of the changes included in this new tax bill, this suspension will be in effect through at least the year 2025.

Tax income rates

There are still seven tax brackets or ranges of income to which tax rates are applied, but in almost all cases, the tax rates imposed on these brackets have been lowered. In most cases, the imposed tax rates have been reduced by between 2% and 4% of what they were previously. The ranges of the tax brackets themselves have been modified slightly, but are still fairly close to what they were in the past.