What’s changing for Americans in the new tax bill?
Quite a bit. The legislation approved by both houses of Congress last week, the Tax Cuts and Jobs Act, represents the most significant revamp of the U.S. tax code since 1986. It now awaits President Trump’s signature.
Most of the provisions generally take effect Jan. 1, 2018, and will run through Dec. 31, 2025. According to the audit/accounting firm PricewaterhouseCoopers, the new tax brackets are as follows:
Individuals/standard deductions. For individuals, the standard deduction nearly doubles to $24,000 (married filers) and $12,000 (single filers). Personal exemptions are repealed at all income levels.
Individual deductions for state and local taxes on income, sales, and property are limited in the aggregate of $10,000 (married and single filers) and $5,000 (married filing separately). Americans can fill the $10,000 deduction bucket however they wish, using income, sales, or property taxes.
Most itemized deductions once subject to the limit of 2 percent of adjusted gross income will no longer be allowed (for example, tax preparation and investment expenses, safe-deposit boxes, legal fees).
In a big win for seniors and the chronically ill, medical-expense deductions are expanded. The income floor was reduced to 7.5 percent of adjusted gross income for both tax years 2017 and 2018, compared with 10 percent of AGI currently.
Mortgage deduction. Individual taxpayers will be generally allowed an itemized deduction for interest on principal-residence and second-residence mortgages up to a combined $750,000.
Taxpayers who entered into pre-Dec. 16, 2017, mortgages are grandfathered; new mortgages may be grandfathered if the purchase contract is dated before Dec. 16, 2017, and other conditions are met. Refinancing of grandfathered mortgages also is grandfathered, but not beyond the original mortgage’s term and amount (some exceptions apply for “balloon payment” mortgages). Interest on a home-equity line of credit is no longer deductible.
Section 529 Plans. In addition to deductions for higher (postsecondary) education, payments from 529 plans of up to $10,000 per year per student can be used for tuition at an elementary or secondary public, private, or religious school. This provision of the bill does not expire in 2025.
Charitable deductions. Cash gifts to public charities are deductible as long as they do not exceed 60 percent of the taxpayer’s AGI. The 80 percent deduction for university athletic-seating rights is repealed. Taxpayers who plan on using the doubled standard deduction in 2018 will not receive a tax benefit for charitable gifts. Those people may want to consider accelerating charitable contributions to 2017 to realize the tax benefit now. Such charitable contributions may be paid directly to charities or to donor-advised funds.
Child tax credit. This increases to $2,000 per qualified child, with $1,400 being refundable. The phase-out of credit begins at $110,000 (single filers) and $400,000 (married filers) in adjusted gross income.
Inflation adjustments. Many, but not all, of the indexed limits would now be determined using the Chained-Consumer Price Index for All Urban Consumers (C-CPI-U), which generally leads to slightly slower cost-of-living adjustments each year. This affects seniors who receive benefits such as Social Security.