Here’s what you need to know about the new tax law. It’s called the Tax Cuts and Jobs Act, and it goes into effect not this tax season but next.
Still, it’s important to know the changes to come so that you can prepare your finances accordingly. We’ve outlined some of those changes below.
The new tax law has its advantages and drawbacks, depending on whom you ask—and when. Timing is important because many individual tax cuts—those cuts that apply to individual taxpayers like you—will expire in December 2025.
Tax cuts for businesses, on the other hand, are permanent.
Overall, the new tax law is meant to make filing taxes less of a hassle, and less confusing, for everyone.
Itemized deductions versus standard deductions
According to the IRS, around 30 percent of taxpayers itemize deductions.
Under the new tax law, the list of itemized deductions—that is, the expenses taxpayers can claim on their tax return—will shrink considerably. Some will disappear completely, like unreimbursed employee expenses.
The standard deduction, however, has doubled. Single filers can take a standard deduction of $12,000, and married couples filing jointly can take $24,000.
Both types of deductions reduce the amount of your income that is taxed, so taxpayers generally choose the type of deduction that yields the biggest tax savings. Because the standard deduction will double next tax season, many taxpayers will choose NOT to itemize.
This is probably the most significant change for individual taxpayers.
As for the 7 income tax brackets for individual taxpayers, the rates have changed slightly, which means the amount withheld from your paycheck will probably be lower, at least through 2025.
Other changes under the new tax law
Child tax credit: Taxpayers can get up to $2,000 per child under age 17, and under the new tax law more taxpayers can claim it.
If you have a dependent other than a young child, such as an elderly parent, or an older child who has a disability, taxpayers can claim a temporary credit of $500.
If you’re divorced or separated after Dec 31, 2018, no tax deduction for alimony payments is permitted. For spouses receiving alimony payments, the alimony is no longer considered taxable income.
You can still deduct medical expenses if your medical expenses are more than 7.5% of your adjusted gross income (AGI).
Taxpayers won’t be penalized for not buying health insurance.
For homeowners, the mortgage interest deduction is limited to debt of up to $750,000.
Homeowners who sell their house for profit can omit up to $500,000 (for single filers it’s $250,000) from capital gains (conditions apply).
Interest from home equity loans can’t be deducted.
Estate tax: This tax applies to property transferred following a death. Few people will be impacted.
If you ride your bike to work, you can’t deduct $20 each month from your income.
If you change jobs, and have to move, you can’t deduct moving expenses such as packaging (boxes, wrapping paper, etc.) or rental trucks.
Student loan interest can still be deducted.
Teachers can still deduct for money they spend on school supplies.
529 savings accounts: Up to $10,000 per year can be used for private/religious education at certain elementary or secondary schools.
Victims of an official national disaster could get additional aid.
For self-employed the news is good—they can take a 20% deduction.
The corporate tax rate was cut to 21%—a huge win for corporations.
Personal exemptions are eliminated.
State and local tax deductions are capped at $10,000.
Finally, if you get your taxes prepared by someone, or you purchase tax prep software, you can no longer deduct those costs on your tax return under the new tax law. Good thing you can file your taxes for FREE with TaxSlayer!
Remember, the tax law changes discussed above do not apply for the 2017 tax season. So, take a deep breath. In the next couple of months, you’ll be filing your tax return as you normally would.