2018 Tax Brackets, Standard Deduction, and Other Changes

We now have the final text of the new tax law. Please note, however, that the Act is long (just over 500 pages) and complicated. Point being: there are many changes that I have not included in this article. My goal here is just to mention some of the changes that are most likely to affect a large number of readers.

Also, many of the changes below have built-in expiration dates (e.g., the new tax bracket system is supposed to last through 2025). However, I have omitted such expiration dates below because they’re several years in the future, and it’s anybody’s guess whether such expiration will actually be allowed to occur. That is, Congress may decide to temporarily renew the changes at some point, may make them permanent, or may repeal them prior to their expiration dates.

Single 2018 Tax Brackets

Married Filing Jointly 2018 Tax Brackets

Head of Household 2018 Tax Brackets

Married Filing Separately 2018 Tax Brackets

Standard Deduction Amounts

The 2018 standard deduction amounts will be as follows:

• Single or married filing separately: $12,000
• Married filing jointly: $24,000
• Head of household: $18,000

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,300 for each married taxpayer or $1,600 for unmarried taxpayers.

Personal exemptions and dependent exemptions will no longer exist.

Child Tax Credit

The child tax credit is increased from $1,000 per child to $2,000 per child, with the phaseout range not beginning until $200,000 of modified adjusted gross income ($400,000 if married filing jointly). Up to $1,400 of the credit (per child) will be refundable.

Changes to Itemized Deductions

Firstly, with regard to mortgages and home equity loans, only interest related to “acquisition indebtedness” will be deductible. This includes debt related to “acquiring, constructing, or substantially improving” your qualified residence. In other words, the interest on many home equity loans will no longer be deductible.

In addition, for “acquisition indebtedness” taken out 12/16/2017 or later, only interest on the first $750,000 of the balance ($375,000 if married filing separately) will be deductible. For loans taken out on or before 12/15/2017, the old $1,000,000 limit ($500,000 if married filing separately) will apply.

The deduction for state/local/foreign property taxes and income taxes remains in place, as well as the option to deduct state and local sales taxes instead of state and local income taxes in any year. The total deduction, however, will be limited to $10,000 per year ($5,000 if married filing separately).

The deduction for medical expenses will still exist. And for 2017 and 2018, the threshold for deductibility will be 7.5% of adjusted gross income rather than 10%.

Personal casualty losses (e.g., losses due to fire, storm, theft) will no longer be deductible unless they are attributed to a federally declared disaster.

Capital Gains and Qualified Dividends

Long-term capital gains and qualified dividends will still have 0%, 15%, and 20% tax rates. The income thresholds separating those different tax rates, however, have changed. For 2018, long-term capital gains and qualified dividends will face the following tax rates:

• 0% tax rate if they fall below $77,200 of taxable income if married filing jointly, $51,700 if head of household, or $38,600 if filing as single or married filing separately.
• 15% tax rate if they fall above the 0% threshold but below $479,000 if married filing jointly, $452,400 if head of household, $425,800 if single, or $239,500 if married filing separately.
• 20% tax rate if they fall above the 15% threshold.

Note that threshold for the top of the 0% tax rate is close to but not the same as the top of the 12% tax bracket.

The 3.8% tax on net investment income that can apply if your modified adjusted gross income exceeds $200,000 ($250,000 if married filing jointly) is unchanged.

Chained CPI

Many amounts that were previously inflation-indexed to CPI-U will now be indexed to chained CPI-U going forward. (I’m not aware of anything that will remain indexed to CPI-U, but I have not done an exhaustive search to check.)

Alternative Minimum Tax (AMT)

The AMT exemption amount will be increased to:

• $70,300 for single people and people filing as head of household,
• $109,400 for married people filing jointly, and
• $54,700 for married people filing separately.

Estate Tax

The estate tax exclusion is being increased to $11.2 million per decedent.

Expanded 529 Applicability

With regard to 529 accounts, qualified distributions have been expanded to include distributions for elementary/secondary public, private, or religious school.

Individual Mandate (2019)

Beginning in 2019, the individual mandate (i.e., the penalty for not having health insurance) will disappear.

Alimony Payments (2019)

For divorces that become finalized in 2019 or later, alimony payments will no longer be deductible to the payor, nor includable as income to the payee.

Pass-Through Business Income

For taxpayers with “pass-through business income” (i.e., income from a sole proprietorship, partnership, or S-corporation), there will be a deduction equal to 20% of such pass-through income. However, if your taxable income (without regard to this deduction) exceeds $157,500 ($315,000 if married filing jointly), several complicating factors can apply.

For instance, if your taxable income is above the threshold amount and your business is a “specified service trade or business” (i.e.,  your business provides services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or the principal asset of your business is the reputation or skill of 1 or more of its employees), your deduction will be reduced.

Or, if your taxable income is above the threshold amount, your deduction for pass-through income from the business may be limited based on your wages from the business (potentially being limited to 50% of such wages, if your taxable income is high enough).