What does the president's Tax Cuts and Jobs Act really mean for you?
In late December of 2017, Congress passed the Tax Cuts and Jobs Act, the most extensive piece of tax reform legislation implemented since the Reagan era. Because media buzz surrounding this reform has caused a substantial number of questions from many American taxpayers, we're here to break down the fundamentals in a way that makes sense to everyone.
How will tax reform benefit individuals and families?
One of the biggest impacts taxpayers can expect involves an increase in the amount of the standard deduction. The previous amount — $6,350 for single filers — is nearly doubled under the reform, now falling at $12,000. Couples who file jointly will find that their standard deduction has risen from $12,700 to a substantially heftier $24,000.
Alternative minimum tax, or AMT, will prove less of an issue for both married and single taxpayers as well. Income exempted for couples filing jointly is increased to $109,400 from $84,500; for single filers, the amount increases to $70,300 from $54,300.
Another considerable component of the Tax Cuts and Jobs Act is the increased Child Tax Credit. Whereas filers could previously claim up to $1,000 per eligible child, the Act now allows double that amount (up to $2,000).
The bill also affords a non-refundable $500 credit for any non-child dependents. Possibly most significant of all is the fact that married couples can now make up to $400,000 before these benefits no longer apply — previously, the ability to claim these credits was limited to couples earning $110,000 or less.
Taxpayers can also now deduct up to a maximum of $10,000 in local and state taxes, though they'll have to decide whether to do so from income/sales tax or property taxes. And for those taking out a new mortgage, deductions are limited to the first $750,000 of the loan (this won't impact filers who currently hold a mortgage).
How are tax brackets changing under the new reform?
Income thresholds and their corresponding tax brackets are changed under the Act. The new brackets are as follows: 10%, 12%, 22%, 24%, 32%, 35% and 37%. This adjustment effectively lowers tax rates for filers in all but two existing brackets (10% and 35%).
Which deductions are reduced or eliminated?
The loss of certain deductions will likely result in confusion and questions from many of your clients, but TaxAct has you covered. We've fully updated TaxAct Professional to reflect all changes under the reform as well as the latest IRS data available.
Dependent and personal exemptions — set at $4,050 for 2017 — are eliminated by the Tax Cuts and Jobs Act. For many families, this may be offset by the aforementioned increase in the Child Tax Credit and added credits for non-child dependents. In addition, the Act officially eliminates any penalty for lack of health insurance after the December 31, 2018.
Filers looking to deduct medical expenses will be able to do so for 2018 as long as those expenses account for more than 7.5% of their AGI.
How will reform alter the role of tax preparation professionals?
Though many of the changes under the president's Act do technically simplify some aspects of tax for families and individuals, there are still a substantial number of uncertainties beyond 2018. Your role as a trusted source of key information will prove even more vital as your clients learn to navigate their taxes now and in the near future.
In all of these (and future) changes, remember: TaxAct Professional is here for you with reliable services and support. From questions regarding the Tax Cuts and Jobs Act to the most up-to-date software available, we help you better serve your clients in all aspects of their tax preparation endeavors. Together, we can look forward to another eventful tax season.