The Tax Cuts and Jobs Act was signed into law on December 22, 2017 with many of its provisions to take effect on January 1, 2018. The bill is quite lengthy with over 500 pages of actual law and another 600 pages of explanation. As is the case with most tax revisions, simplification is not a word used to describe the new law. There were many changes to the corporate tax law including significant reductions in the corporate tax rates and changes to encourage companies to repatriate their earnings that were held in overseas locations. This article covers some of the changes that relate to personal taxes. As always, consulting your tax advisor is the best way to fully understand how these new rules may apply to your situation.

This article does not replace the expert advice of professionals, but rather explains some of the basics so you can better understand how our income tax structure works, how it can affect your financial decisions and how you can be a more-informed income taxpayer.

Our income tax system is generally described as a progressive, marginal rate system. This means that as we earn more income, we pay higher rates of tax on that income. To better understand this consider the following three components – how much is taxed, what tax rates apply and how do we pay the tax. Then, unfortunately, there are all the additional rules.

New Personal Income Tax Rates

The new law maintains the progressive rate structure with seven brackets with the top bracket being reduced from 39.6% to 37%.

Table data for Income Tax Rates for 2018
2018 Single Return Rate Schedule 2018 Married Filing Jointly Return Rate Schedule Alert Me
Taxable Income Levels Tax Rate Taxable Income Levels Tax Rate Alert Me
$9,326 to $37,950 15% $18,651 to $75,900 15%
0 to $9,525 10% 0 to $19,050 10%
$38,701 to $82,500 22% $77,401 to $165,000 22%
$82,501 to $157,500 24% $165,001 to $315,000 24%
$157,501 to $200,000 32% $315,001 to $400,000 32%
$200,201 to $500,000 35% $400,001 to $600,000 35%
Over $500,000 37% Over $600,000 37%

Favorable treatment of long term capital gain and qualifying dividend is maintained, but the way the lower rates are applied changes somewhat.

Table data for 2018 Taxation of Qualifying Dividends and Long Term Capital Gains
Tax rate on long term capital gains and qualifying dividends Taxable income levels for those filing individual returns Taxable income levels for those filing joint returns Alert Me
0% Under $38,600 Under $77,200
15% $38,600 to $425,800 $77,200 to $479,000
20% Over $425,800 Over $479,000

Standard Deductions

The standard deductions for 2018 were increased to $12,000 for those filing individual returns and $24,000 for those filing joint returns.

Personal Exemptions

Personal exemptions were eliminated.

Itemized Deductions Beginning in 2018:

  • The limit for the state and local tax deduction is $10,000. This includes income taxes, property taxes and sales taxes.

  • The mortgage interest deduction was modified to only allow the deduction of interest on new mortgages up to $750,000, down from $1 million. The rules on deducting interest on re-financed mortgages are also changed and consulting your tax advisor is essential. Interest on home equity loans is no longer allowed.

  • Charitable contribution deductions continue to be allowed with some increase on their limit.

Alternative Minimum Tax

The exemption amounts for AMT have been increase to $70,300 for single return filers and $$109,400 for married couples filing joint returns.

The Kiddie Tax

Unearned income (interest, dividends and capital gains) for children is now subject to the same rates as trusts with preferential rates for long term capital gains and qualifying dividends. These rules can be complex, and you may want to consult your tax advisor to see how they may apply to your situation.

Passthrough Business Entities

Many small businesses are formed as partnerships, limited liability corporations or subchapter S corporations with their income flowing through to the partners or shareholders. To bring the taxation of this type of income into line with the changes to the corporate tax rules, the partners or shareholders will be allowed to deduct a portion of that income. The rules are complex, and you will probably want to consult your tax advisor.

Section 529 Plans

These arrangements provide tax benefits for saving for education. The old rules only applied to funds used for certain college expenses. The new rules allow for funds to be used for kindergarten through high school expenses as well with some limits.

Estate Taxes

The exemption for determining when an estate is subject to the 40% estate tax has doubled to $11.2 million for 2018.

Other Issues

There are other provisions of the new laws related to the individual mandate for health insurance coverage, the potential expiration of provisions and a lot more. You should expect that the income tax rules will continue to change in the years ahead and probably not get any simpler. If your tax situation is in any way complicated, the services of a qualified tax professional to assist you will probably continue to be essential.