In a Nutshell
Tax reform created some new tax cuts and enhanced others. Depending on your situation, you may get a higher tax refund for the 2018 tax year. Learn about seven changes to the tax code that could reduce your tax liability.This article was fact-checked by our editors and reviewed by Jennifer Samuel, senior product specialist for Credit Karma.
Tax reform made significant changes to the tax code that could reduce your tax liability or increase your tax refund.
Whether you’re single or married with a family, an employee or self-employed, your tax bill will be affected by the Tax Cuts and Jobs Act of 2017. Here are seven of the most significant tax cuts that take effect in the 2018 tax year and how they may impact your finances.
- New tax rates and brackets
- Higher standard deductions
- Increase in child tax credit
- Lower threshold for medical expense deduction
- Repeal of limit on itemized deductions
- Increase in charitable deduction limit
- 529 plan changes
1. New tax rates and brackets
Congress lowered tax rates across the board for all Americans and updated the income brackets for each tax rate.
“If you take a single person and their taxable income is $100,000,” says Jeff Levine, a Massachusetts-based CPA with Alkon & Levine, “they would pay roughly $2,700 less in taxes this year because the rates have changed and the bracket has changed.”
Here’s a look at the tax brackets for the 2018 tax year.
|
2018 Tax Bracket Thresholds Taxable Income by Filing Status |
||||
|
Marginal tax rate |
Single | Married filing jointly | Head of household |
Married filing separately |
| 10% | $0–$9,525 | $0–$19,050 | $0–$13,600 | $0–$9,525 |
| 12% | $9,526–$38,700 | $19,051–$77,400 | $13,601–$51,800 | $9,526–$38,700 |
| 22% | $38,701–$82,500 | $77,401–$165,000 | $51,801–$82,500 | $38,701–$82,500 |
| 24% | $82,501–$157,500 | $165,001–$315,000 | $82,501–$157,500 | $82,501–$157,500 |
| 32% | $157,501–$200,000 | $315,001–$400,000 | $157,501–$200,000 | $157,501–$200,000 |
| 35% | $200,001–$500,000 | $400,001–$600,000 | $200,001–$500,000 | $200,001–$300,000 |
| 37% | $500,001 and more | $600,001 and more | $500,001 and more | $300,001 and more |
Of course, calculating your tax isn’t as simple as multiplying your income by your tax rate. For each tax bracket and filing status, tax is calculated by applying the tax rate to income that falls within the thresholds for the bracket and adding a set amount of tax as laid out in the TCJA.
2. Higher standard deductions
Most taxpayers are afforded a standard deduction amount to reduce their taxable income. The amount of your standard deduction depends on your filing status. As part of the tax cuts, Congress nearly doubled the standard deduction for all taxpayers.
|
Filing status |
2017 tax year |
2018 tax year |
| Single and married filing separately | $6,350 | $12,000 |
| Married filing jointly and surviving spouse | $12,700 | $24,000 |
| Head of household | $9,350 | $18,000 |
That said, not everyone will see a decrease in their tax. The increased standard deduction is tempered a bit by the elimination of personal exemptions (a deduction you could take for you, your spouse and your dependents).
Each exemption was worth $4,050 in 2017, which means that large families may not consider the raised standard deduction amount as a tax cut. In 2017, for instance, a married couple with three children could take a standard deduction of $12,700 and five personal exemptions worth $20,250, for a total of $32,950.
In 2018, however, that same family would only get the $24,000 standard deduction.
3. Increase in child tax credit
While eliminating the personal exemption could be viewed as a negative for larger families, Congress increased the value of the child tax credit to help counteract it. The credit was upped from $1,000 to $2,000 per qualifying child, of which up to $1,400 could be refundable.
What’s more, the new tax policy makes it possible for higher-income families to receive the credit. In 2017, the credit started phasing out when your adjusted gross income was $75,000 (or $110,000 if you were married and filed jointly). Under the new plan, those thresholds go up to $200,000 and $400,000, respectively.
“It’s huge,” says Levine, “because it’s a real credit and not just a deduction.”
A tax credit reduces how much you owe in taxes dollar for dollar. A deduction, on the other hand, reduces your taxable income, which is what the IRS uses to calculate how much you owe.
FAST FACTS
What is a refundable tax credit?
A refundable tax credit means that you could get some or all of the credit in the form of a tax refund.
For example, if you owe $1,000 in taxes and qualify for a refundable tax credit worth $2,000, you could get the additional $1,000 back as a refund. But if that $2,000 credit were nonrefundable, it would only reduce your tax bill by $1,000, down to $0, and that’s it.
4. Lower threshold for medical expense deduction
If you itemize instead of taking the standard deduction, you may be able to deduct qualified and unreimbursed medical expenses above a certain amount. In 2017, that amount was 10% of your adjusted gross income. So if your AGI was $100,000, you could only deduct the amount of your medical expenses that exceeded $10,000.
In 2018, that threshold is 7.5%, which could save certain taxpayers thousands of dollars. Out of the many tax cuts in the new tax plan, this is one of the few that expires at the end of the 2018 tax year.
5. Repeal of limit on itemized deductions
“There used to be a phaseout of the itemized deductions,” says Levine, “and that no longer applies. So if you are itemizing, you get all of your itemized deductions.”
Before the Tax Cuts and Jobs Act, you couldn’t maximize your itemized deductions if your AGI was $261,500 or more if you were single, and $313,800 or more if you were married and filing jointly.
Keep in mind, though, that it still may not make sense to itemize your deductions unless they exceed your standard deduction amount.
6. Increase in charitable deduction limit
If you’re a philanthropist, you can now donate up to 60% of your AGI to qualified charities and deduct it from your taxable income as an itemized deduction. Previously, the limit was 50%.
“It’s a very minor [tax cut],” says Levine. “You don’t see a lot of people donating that much of their income to charity.”
7. 529 plan changes
If you’ve been contributing to a 529 plan for one or more of your kids, you can now take tax-free withdrawals for more than just college costs.
With the new tax law, Congress allows parents to withdraw up to $10,000 per student, per year, to pay tuition for public, private or religious elementary and secondary schools.
FAST FACTS
How does a 529 plan help me save on taxes?
When you contribute to a 529 plan, your earnings will grow tax-free, and you can take tax-free withdrawals as long as they’re for qualified education expenses. What’s more, some states offer state-tax breaks on 529 plan contributions.
Bottom line
Regardless of your tax situation, you may benefit from one of the many tax cuts that Congress passed in 2017. It can be tough to keep track of all these changes and which ones you qualify for, though.
Jennifer Samuel, senior tax product specialist for Credit Karma, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.