2018 Tax Cuts for Individuals

We are cautious in saying this, but we do believe congress has finally done something that helps the middle class!  The recent tax reforms will have the largest impact on business owners and corporations.  However, having now prepared a number of 2018 tax projections for our individual clients, we are finding that everyone is going to benefit.

Here are four major tax law changes that will make the most impact on the middle class, beginning in 2018:

  1. Individual tax rates have been lowered. 
  2. The standard deduction has been increased. 
  3. Personal exemptions have been eliminated.
  4. Child tax credits have been increased. 

More Details

+  Lowering of Individual Tax Rates

The lowering of individual tax rates is real.  Tax a look at the difference in blended tax rates for the following examples:                                                                                               

                                                                                                       2017       2018       Savings

  • A married couple with taxable income of $85,000              15%        12%        $2150
  • A single person with taxable income of $55,000                 17%        15%        $1450

These savings are enough to notice.  A taxpayer can further multiply his tax savings by putting the amount saved into a retirement plan, thus further lowering current taxable income and taxes.

+ IncreasedStandard Deduction

The standard deduction is the amount of income that the IRS allows a taxpayer to deduct from adjusted gross income before tax is calculated.  Those who itemize their deductions are the ones who have more deductions than the standardized amount. 

Beginning in 2018, the standard deduction has been increased to $24,000 from $12,700 for married couples, and to $12,000 from $6,350 for single people.

 Loss of Personal Exemptions

For many years, personal exemptions have been another deduction that has been granted by congress to give taxpayers a benefit due to family size.  This benefit, formerly $4,050 for each person claimed on the tax return, has been taken away by the tax act.

+ IncreasedChild Tax Credit

To partially offset the negative effect of losing personal exemptions for children, Congress has increased the child tax credit (for children up to age 16) from $1,000 to $2,000. Up to $1,400 of this credit is refundable, which means a taxpayer can actually get back more than he paid in.  For you tax nerds out there, tax credits are more powerful than tax exemptions and deductions.  Therefore, a  $,1000 increase in tax credits is equal to a $4,000 tax exemption for a person who is in the 25% marginal tax bracket. 

Here are some other changes that are worth noting:

  • Payments of alimony will not be deductible for agreements signed after December 31, 2018.  Those in the process of negotiating divorce settlements should bear this in mind.
  • Itemized deductions for high-income individuals will no longer be subject to phase-out limits.
  • Miscellaneous itemized deductions will no longer be available.  Individuals who receive a W-2 will no longer be able to claim work-related expenses, like unreimbursed mileage, as miscellaneous itemized deductions. 
  • Moving expenses are no longer deductible.

The above information is not a complete list of changes affecting individual taxpayers in the 2017 Tax Cuts and Jobs Act, and does not include a discussion of business tax law changes. If you would like a personal projection of how the tax law will affect you, please contact us.

Author: Lou Alice Funk, CPA, MBA