President Donald Trump’s tax plan was approved on December 22, 2017. Until that time, America waited on pins and needles to see how many of the proposed tax deductions would be made official via the House and Senate. Taxpayers can finally throw some hard numbers on the board now that the Tax Cuts and Job Act is confirmed. There are many ways this new bill will affect everyday Americans, both positively and negatively. Here are the deductions and reductions you are eligible for under the new law, as well as a few key tax breaks that will disappear.
1. Lower tax rates
Many will be happy to know that the Tax Cuts and Jobs Act will lower the tax rate for almost everyone. It will also reshape the tax brackets that would traditionally push you into the next, higher bracket. Your taxable income will vary depending on how you file, but the tax rate will be the same for single and married filers. A detailed chart can be found here, but the new rates under Trump’s tax plan are as follows:
- 10% (no change).
- 12% (3% decrease).
- 22% (3% decrease).
- 24% (4% decrease).
- 32% (1% decrease).
- 35% (no change).
- 37% (2.6% decrease).
Next: Big changes for everyone who utilizes the standard deduction
2. A higher standard deduction
Increases in your standard deduction will make it much easier to lower your taxable income moving forward. The new law adjusted the standard deduction for 2018 to $12,000 for single filers and $24,000 for joint filers, up from $6,350 for single taxpayers in 2017. This is good news for the 70% of Americans who claim the standard deduction when filing their taxes, as this will certainly help put some money back in their pockets.
Next: What about for those who itemize?
3. Widespread changes to itemizing deductions
Those who choose to itemize their deductions will also see a few key reductions under Trump’s tax plan. The TCJA addressed medical, charitable, business expenses, and more in their plan. For example, you will see changes to:
- Medical expenses deduction: You can deduct expenses that exceed 7.5% of your taxable income, down from 10%. This new rate applies to 2017 expenses, too. Starting in 2019, the 10% floor returns.
- Charitable expenses: up to 60% of taxable income, increased from 50% in 2017.
- Student loan deductions: up to $2,500 of the interest paid on loans last year (even non-itemizers can claim this deduction).
- Business equipment: the cost of all new and used business equipment, plus research and development expenses.
Next: What you must know about child tax credits
4. Child tax credits double per child
Another bonus credit available under Trump’s tax plan is the amount taxpayers can claim for each child under 17. The child tax credit is doubling for parents, who can now claim $2,000 per child for couples making up to $400,000. Also, the first $1,400 is refundable, meaning you could score an actual refund from the government should your tax bill fall below zero.
Next: But there’s more!
5. A new credit for non-child dependents
The TCJA now allows a new $500 credit for dependents who don’t traditionally qualify for the child tax credit through 2025. This helps taxpayers claim credit for non-child dependents like an elderly parent living at home as well as children 17 and older. Keep in mind that, unlike the child tax credit, this credit is non-refundable
Next: Changes to how you can save for education
6. 529 plans can be used for more than just college
Until now, you could only use 529 plans, commonly known as college savings plans, to stash money away for college tax-free. Under the new bill, you can use these plans to pay for private, elementary, secondary, and homeschooling expenses. You can also withdraw up to $10,000 a year without penalty, making it easier for families to fund educational expenses of all types.
Next: Did you inherit money?
7. A bonus for people who inherit money
A change to the estate and gift tax law means that 2018 is going to be the best year to inherit a large chunk of cash. Under TCJA, you don’t have to pay taxes on $11.2 million for individual taxpayers ($22.4 million for married couples filing jointly). This new estate tax break nearly doubles the existing exemption base of $5.49 million.
Next: Unfortunately, this common tax deduction will be less generous come 2018
8. Mortgage interest deduction is lower
2018 will take a huge bite out of the amount you can deduct from your home mortgage interest. The new limit will decrease by $250,000 to just $750,000. This change applies to all home contracts signed after December 15, 2017. All closed contracts prior to that date are eligible for the old $1,000,000 mortgage interest deduction cap from 2017.
Next: A controversial repeal
9. Obamacare tax penalty repealed
The TCJA also repeals the Obamacare tax applicable to those without health insurance in 2019. The mandate previously required all Americans to carry insurance or pay a tax penalty. Some say the majority of Americans will remain unaffected, as most people receive coverage through their employers, public health programs, or military health services. But those who make too much money to apply for programs like Medicaid, or Americans who are self-employed, will see a change in Obamacare’s private insurance markets.
Whether this is a good or bad deduction depends on the individual. Millions will drop their plans without the threat of a penalty as a result of the repeal, but others worry this could cause healthcare costs to rise as healthy people exit the market.
Next: Beware of this tax change
10. Tax preparation fees don’t qualify for deductions anymore
2017 marks the last year the IRS will allow you to deduct costs associated with preparing and filing your taxes. Whether you enlist the help of a tax professional or an online software program, you won’t be able to deduct those related expenses next year. This law is set in stone until 2025.