Over 15 years as a professional tax preparer, writing over 200 returns each year.
The Change: Increase in the Child Tax Credit (CTC)
Who benefits: Families with children under age 17.
Who doesn't benefit: No kids, no credit—no change.
Under previous rules, each child that had not reached age 17 during the year being filed was a qualifying child for the CTC. The CTC itself is "non-refundable," meaning it can zero out an income tax liability, but it cannot be paid out as a refund itself. Lower income families, whose tax liability is already zeroed out through deductions and exemptions, got no benefit from the CTC. So Congress created the "refundable" Additional Child Tax Credit (ACTC), allowing unused portions of the CTC to roll into the ACTC. The total of the CTC and ACTC could not exceed $1,000 for each qualifying child.
Under 2018 rules, the CTC increases to $2,000, but no more than $1,400 can roll into the ACTC. Many families with younger children will see their refund go up from the CTC and ACTC, but it might not double.
The Change: Other Dependent Credit
The Other Dependent Credit is $500 for a dependent that doesn't qualify for the CTC. This helps offset the loss of the personal exemption.
Who benefits: Households with dependents that aren't eligible for the CTC, including those with full-time college students, parents, grandparents or adult siblings.
Who doesn't benefit: An exemption decreased 2017 taxable income by $4,050. For folks in the 15% tax bracket, being able to claim an exemption for a dependent lowered federal tax by $607.50. In the 25% bracket, the savings was $1,012.50. A $500 credit helps, but doesn't completely replace the value of the exemption. Taxpayers with income over $200,000 ($400,000 for MFJ) will have this credit reduced or eliminated.
The Change: Exemptions Are No Longer Allowed
Who benefits: Taxpayers, married or single, with no dependents.
Who doesn't benefit: Higher-income taxpayers, and those with many dependents.
To offset the loss of exemptions, Congress increased the standard deduction. See the next section for how these two changes interact.
The Change: Higher Standard Deduction
Who benefits: Taxpayers who didn't itemize before, certainly, and those whose itemized deductions were higher than the standard deduction but not hugely so.
Who doesn't benefit: Taxpayers who itemized, especially those with high state taxes (income tax or real estate).
The 2018 standard deduction for single taxpayers is $12,000; for heads of household, $18,000; for married filing jointly, $24,000.
In 2017, a single taxpayer with no dependents decreased her taxable income by $6,350 for the standard deduction and $4,050 for her personal exemption, a total of $10,400. In 2018, that taxpayer gets a standard deduction of $12,000 and no personal exemption. Net change is a decrease in taxable income.
If, in 2017, that single taxpayer had Schedule A itemized deductions of $11,000 in addition to the personal exemption of $4,050, the increased standard deduction turns into an increase in taxable income.
Let's change to a married couple, filing jointly, with three dependents. For the moment, we'll ignore any tax credits. In 2017, their standard deduction was $12,700. They had five exemptions—taxpayer, spouse, three dependents—for $20,250. All this decreased taxable income by $32,950, compared to the $24,000 that will be allowed in 2018.
The Change: Tax Simplification, Having to Do with Schedule A Itemized Deductions
Four items jumped up at me as "simplification."
1. As I already mentioned, the higher standard deduction. Fewer taxpayers will benefit from itemizing deductions. That doesn't mean you can't claim your mortgage interest or your charitable. It means that you might not want to, if you don't benefit from doing so.
2. The elimination of "Miscellaneous Deductions Subject to 2% of AGI." This is the section of Schedule A in which:
- salesmen wrote off the mileage they weren't reimbursed for;
- over-the-road truckers claimed a meal per diem for nights spent away from home;
- hobbyists could claim hobby expenses (up to hobby income);
- people listed attorney or brokerage fees incurred to create taxable income;
- people deducted union dues, small tools, uniform expenses, and tax preparation fees.
Since all of these were subject to that 2% of AGI floor (meaning only the amount over 2% of your income would count), most taxpayers had little use for this collection of itemized deductions.
3. The loss of the home equity interest deduction. Under previous law, as long as the home equity loan was less than $100,000 and the amount didn't cause the home to be "under water" equity-wise, the interest was deductible. In 2018, it no longer is, unless it is used to improve the taxpayer's principal residence. (This one may be a nightmare for both the IRS and taxpayers -- my original HELOC was used for much-needed work on the house, but after I'd paid it down a bit, I borrowed against it to buy a car. How much of my HELOC interest is deductible? ... ! )
4. The phaseout of certain itemized deductions for high-income taxpayers. This limit is not in effect for 2018.
The Change: Limits on the Deduction of State and Local Taxes (SALT), Still on Schedule A
Who benefits: No one, really, though folks in states with lower real estate taxes may not notice a difference.
Who doesn't benefit: High-income taxpayers who pay state income tax, and folks from states with high property taxes (including California, New York, New Jersey and others). Married filing joint returns will feel this limit more than unmarried.
The new tax code imposes a limit on the SALT that can be deducted on Schedule A. For single, head of household, qualifying widow(er) and married filing jointly, the limit is $10,000.
A single taxpayer with moderate income who lives in a state with low property taxes might have $3,000 in state withholding, $4,500 in real property taxes and $750 in personal property tax. This person will not notice a difference from the new limitation.
A married couple, each making about the same amount of money, living in the same state, would have $6,000 in state withholding ($3,000 each), $4,500 in real property taxes and $750 in personal property tax. In 2017, this couple would have shown $11,250 on Schedule A. For 2018, the deduction will be limited to $10,000.
The Change: Moving Expenses Are No Longer Allowed as an Adjustment to Income
Who benefits: Well, not so much a benefit, but active duty military families moving under orders can still take their out-of-pocket costs. (Costs covered by the military are excluded from income already.)
Who doesn't benefit: Anyone who moves to take a new job. Folks moving for retirement were not allowed to claim this adjustment.
The Change: Generally Lower Tax Rates
Who benefits: Almost everyone.
While the changes to Schedule A and the loss of exemptions may increase taxable income, most of the tax rates have decreased. What had been the 15% bracket, is now 12%. The 25% bracket has become the 22% bracket. The lowest bracket is still 10%, so if your taxable income is low enough, you won't see a change.
Temporary Change: The Floor for Medical Expenses Remains 7.5% for 2018
Who benefits: Folks who have high medical expenses (including health insurance) and who can also itemize.
For 2018, taxpayers can still benefit from medical expenses in excess of 7.5% of their AGI. This means if you have already met the floor, or are close, you want to consider paying medical bills before 2019 to take advantage of the deduction. Medical costs paid by credit card are considered "paid" for tax purposes, even if you're still carrying the balance.
The Change: Since Taxes Went Down, Withholding Tables Were Changed in Early 2018
Who benefits: Almost everyone got a little bit bigger paycheck during the year.
Who doesn't benefit: Anyone whose tax goes up under the new rules (say, from the Schedule A changes) will find they also had less withholding, a double whammy when the tax bill comes due next April.
So, What Does It All Mean to Me?
Some folks have a clear cut win: their refunds go up. Others will have some new tax credits or larger ones, but will lose deductions. Some taxpayers are just going to be stuck with higher taxes. Until you can talk to a tax preparer or get the newest software, it's going to be difficult to say if you've won under the new tax law.
How do you think you'll do?
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.