Introduction:
In December 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA), bringing with it some of the most comprehensive changes to the U.S. tax code in decades. Now that we’ve had time to see these changes in action, it is crucial to understand how they impact your personal finances and how you should prepare for their continuing effects.
1. Changes in Income Tax Brackets:
The TCJA maintains the seven income tax brackets but lowers the rates for most brackets. The new rates range from 10% to 37%, with top earners seeing reduced rates from pre-2018 levels. However, these reductions are set to expire after 2025, meaning that taxpayers will need to keep an eye on any upcoming legislative changes.
2. Increase on Standard Deductions and Elimination of Personal Exemptions:
The TCJA nearly doubles the standard deduction for individuals and married couples, effectively simplifying the filing process for many taxpayers. However, personal exemptions have been eliminated. In some cases, this may result in lower overall deductions for taxpayers with larger families, potentially increasing their tax liability.
3. Changes to Itemized Deductions:
Many itemized deductions have undergone significant changes under the TCJA. For instance, state and local tax (SALT) deductions are now capped at $10,000, mortgage interest deductions are limited to loans of $750,000 or less, and home equity loan interest is no longer deductible unless used to buy or improve a home.
4. Expansion of Child Tax Credit:
The TCJA has doubled the child tax credit amount from $1,000 to $2,000 per qualifying child under 17 years old while also increasing the income limits for claiming this credit. This expansion provides additional relief for families with children that were affected by the elimination of personal exemptions.
5. Changes for Self-Employed and Small Business Owners:
The TCJA introduces a new 20% Qualified Business Income QBI) deduction, which allows self-employed and small business owners to deduct up to 20% of their business income. This change can significantly reduce the tax burden for eligible taxpayers, though there are limitations based on income level and the type of business.
Conclusion:
While some individuals may benefit from these changes in the short term, it is important to remember that many of its provisions are set to expire at various dates in the future. Taxpayers should stay informed about any potential future legislative changes and consider consulting with a tax professional to ensure they are taking advantage of available deductions and credits. By staying proactive with tax planning, taxpayers can better prepare for how the new tax code will impact their finances in both short and long-term scenarios.
