Will Your Taxes Go Up or Down Under the New Tax Rules?
Congress has approved the most sweeping overhaul of the U.S. tax code in three decades, cutting individual income tax rates and removing a number of breaks and deductions. The plan will become law once President Trump signs it, as he has promised to do.
The full bill and supporting materials run to more than 1,000 pages, but here’s a quick look at what’s changing and how your tax bill might change, too, starting with the 2018 tax year.
How will your tax bracket change?
An important note: Your tax bracket doesn't necessarily reflect how much tax you'll owe — being in the 35% bracket, for example, doesn’t mean you’ll pay 35% on everything you made. Your taxable income is divided into chunks (also known as brackets), and each chunk gets taxed at its corresponding rate. So you're taxed at 10% on the first chunk, then at the next rate up on the next chunk, and so on. For more on how tax brackets work in a progressive tax system, check out this explainer. How this could affect you: Generally, the bill lowers individual tax rates. But these new rules expire after 2025 unless a future Congress chooses to extend them.
Standard deduction and exemptions
» The standard deduction nearly doubles, so many more people may end up taking it. The personal exemption goes away. Current 2018. New 2018 Standard deduction.
Head of Household: $9,550
Head of Household: $18,000
Personal exemption$4,150 per taxpayer and dependentNone
How this could affect you: Taking the standard deduction for the 2018 tax year might score you a lower tax bill than itemizing would. Using the standard deduction generally takes less time than itemizing does, so it also could lower your tax-prep bill (and your stress level).
Also, your payroll tax withholding amounts are probably going to change in January or February, so prepare to see differences in your paycheck. You can adjust your withholdings by filing a new W-4 with your employer.
Child and family tax credits
» The child tax credit doubles, and a large portion of the amount is refundable.
Current 2018New 2018
Maximum credit$1,000 per child
$2,000 per child
$500 for non-child dependents
Phase out starts at
$75,000 AGI for single filers
$110,000 AGI for joint filers
$200,000 AGI for single filers
$400,000 AGI for joint filers
How this could affect you: The child tax credit is bigger and more families will qualify for it. Taxpayers with non-child dependents also get a break. Up to $1,400 of the credit is refundable, which means lower-income families could get bigger refunds. The loss of the personal exemption cancels out some of the savings.
Homeownership tax breaks
» Tax breaks shrink for some homeowners. The mortgage interest deduction is scaled back for those with large mortgages, and the tax deduction for property taxes and state and local taxes is capped.
Mortgage interestYou may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.
For homes bought before Dec. 15, 2017, no change.
For homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000 ($375,000 if married filing separately).
Property taxes You may deduct the property taxes you pay on real estate you own.You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
Home equity debt. You may deduct interest on up to $100,000 of home equity debt ($50,000 if married filing separately).
Capital gains exclusion. You must have owned the home, and used it as your primary residence, during at least two of the five years before the date of sale. You cannot have used this exclusion in the two years before the sale of the home. No change Moving expenses. You can deduct some moving expenses if you meet distance and time requirements.Only active-duty members of the armed forces may deduct moving expenses.
How this could affect you: If you’re thinking about buying a house or already have a big mortgage, read more on how the tax changes could affect homeowners. Note that you have to itemize to take the deductions for mortgage interest and state and local and property taxes, so this is less of an issue if you decide to take the standard deduction.
Education tax credits and deductions
» No big changes for those with student-loan debt or who rely on education credits. The 529 expansion could help families that send their kids to private school.
Current 2018New 2018
Education credits available
American Opportunity Tax Credit
Lifetime Learning Credit
Tuition and feesUp to $4,000 (in lieu of taking education tax credits)No change
Student loan interest deduction$2,500No change
College-savings plansA 529 plan allows for tax-advantaged savings for future college costsCan take up to $10,000 a year out of a 529 plan to pay for public or private elementary or secondary school.
Teachers' classroom expenses$250No change
How this could affect you: If you have a child in private elementary, middle or high school, you can now use your 529 to pay tuition. Though contributions to 529 plans aren’t deductible on your federal tax return, they might be deductible on your state return.
Much remains the same for students, but there’s another political battle looming that could have bigger consequences for them.
Other itemized deductions
» Heavy itemizers could see a lot of their deductions go away.
State and local taxes Income taxes, or sales and property taxes, are deductible.All state and local tax deductions are capped at $10,000. Medical expenses. You can deduct out-of-pocket expenses in excess of 10% of AGI You can deduct out-of-pocket expenses in excess of 7.5% of AGI (Note: This provision applies only to the 2017 and 2018 tax years)
How this could affect you: If you’ve been itemizing your tax return and you live in a state with high income taxes or you own a house in an area with high property taxes, this could work against you (if you’ve been deducting more than $10,000 and still plan to itemize). Lowering the medical-expenses threshold to 7.5% means more of your out-of-pocket costs in 2017 and 2018 could be deductible.
Also, under previous rules, a number of miscellaneous tax deductions allowed only the portion of the expense that exceeded 2% of your adjusted gross income to be deducted. There are many of these, but popular ones include deductions for a home office, tax-preparation expenses and a host of job-related expenses. The new bill gets rid of the 2% rule, as well as the deductions that were subject to it.
If you’re a big itemizer and your expenses were big enough to exceed the 2% threshold, this one could be painful. Remember, though, that you also may be moving to a lower tax bracket.
Other individual taxes
» A number of important tax regulations also saw some changes.
Health-insurance mandateThere's a penalty for not having health insuranceEliminated starting in 2019
Pass-through income Taxed at individual income tax rates 20% deduction allowed for those who qualify, phasing out starting at $157,500 ($315,000 for joint filers)
Capital gains Top rate of 20% (plus 3.8% for net investment income tax)
No change Estate tax Exemption set at $5.6 million Exemption set at $11.2 million
Alternative Minimum Tax High-income taxpayers subject to an alternative calculation of their tax owed. Increases exemption amounts to $109,400 for married filers and $70,300 for single filers. This means fewer people will pay it.
How this could affect you: The new rules concerning pass-through income may be good for freelancers and owners of profitable small businesses, but subject to some special rules based on your income and the type of business. It may be best to consult with your tax accountant about the full impact.
Does all this help me, or not?
Virtually everything takes effect on Jan. 1, 2018, and will impact the tax returns due in April 2019. (The return you’ll prepare this coming April generally will be under old rules; to get a sense of where you stand, try our tax calculator.) A number of the new rules expire on Dec. 31, 2025, though a future Congress could decide to extend them.
The House Ways and Means Committee says a typical family of four making $73,000 a year would save $2,059 per year in taxes. But we all know averages aren’t very useful if you’re wondering what’s going to happen to your tax bill.
People will get a wide range of non-average answers when they factor in real-life things such as where they live, whether they’ve been itemizing or taking the standard deduction, whether and how much they invest for college and retirement, whether they have a side gig, and — if they’ve been itemizing — what specific types of things they’ve been deducting.