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The Most Important Changes to Your 2018 Taxes

January 26, 2018

  • Most taxpayers will see some form of tax savings under the new tax plan
  • Some popular deductions, like the mortgage interest deduction, have decreased
  • The standard deduction doubles to $12,000 for individuals and $24,000 for families
4 min read

Ready or not, tax season is nearly upon us. And if you’re like a lot of people, you may be wondering how the new tax plan will affect you.

If you’re just tuning in, here’s a recap:

In December, Congress passed the most significant overhaul to the tax code in a generation. While the wealthy and corporations get the greatest portion of tax cuts, a broad swath of taxpayers are also likely to see some tax benefits.

As a general rule, households with income under $150,000 annually will see their taxes decrease between $500 and $2,000, says Austin Carlson, a tax lawyer and certified public accountant with Gray Reed & McGraw, in Houston.

“Among non-partisan analysts there is agreement that about 80% of households will see a tax decrease,” Carlson says.

Meanwhile, higher income households in high-tax states like New York and California are likely to see an increase, since some important deductions for them are decreasing  or going away altogether.

Good to know: Individual filers typically pay their current year taxes by mid-April of the following year. So for the changes we’re talking about here–which go into effect in 2018–you’ll account for them on your tax forms by the April, 2019 deadline, when you either pay taxes of file for a refund.

Let’s start with your taxes.

Changing brackets.The tax plan maintains the IRS’s current seven tax brackets, but lowers rates for five of them and reshuffles income thresholds. It may sound confusing, but here are two examples of new individual tax rates that might help you understand:

The following charts explain more of the bracket changes:

Source: Wall Street Journal

Source: Wall Street Journal

The personal exemption goes away.  In 2017 this was a standard credit of $4,050 per person, available to many middle income taxpayers.

“Among non-partisan analysts there is agreement that about 80% of households will see a tax decrease.”

The standard deduction doubles. In its place, something called the standard deduction–or the amount of income free from taxes–for individuals and families will nearly double to $12,000 and $24,000 respectively. That means families earning less than $24,000 annually will pay no taxes.

The child tax credit doubles to $2,000 from $1,000. The child tax credit is, as its name suggests, a tax credit for each child, primarily for middle-income and low-income families.

The interest deduction for mortgage debt drops to $750,000, from $1 million. Most homeowners rely on this deduction to pay a portion of their housing costs during the year. A deduction for up to $100,000 of home equity debt is eliminated.

Deductions for state and local taxes will be replaced by a flat $10,000 deduction including property, income and sales tax, Carlson says.  Residents in high-tax states including New York, New Jersey and California are likely to be affected the most, experts say.

The annual deduction for medical expenses will increase, for amounts in excess of 7.5% of gross income. Under current law, taxpayers may deduct for expenses in excess of 10% of adjusted gross income. Health care groups and other lobbyists criticized an earlier House that would have eliminated the deduction.

The deduction for student loan interest of up to $2,500 annually will remain. Earlier bills had proposed getting rid of it.

If you own a business:

If you’re wealthy:

Changes to estate taxes. The estate tax of 40% will remain, but only for estates valued at $11.2 million or more, which is double the current estate value that triggers the tax.

Other things to keep in mind:

Most of the tax reductions for individuals and families will expire in 2025. So Congress will have to vote to extend them.

The corporate tax cuts are provisionally permanent, however. Although analysts say that’s up for debate.

The tax plan also eliminates something called the individual mandate starting in 2019. The individual mandate is one of the primary underpinnings of the Affordable Care Act, known as Obamacare. It currently requires all taxpayers to purchase healthcare insurance or pay a tax penalty.

Without the mandate, some experts predict massive disruption in health insurance markets, with more people losing access to health care.

 

 

 

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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