The Tax Cuts and Jobs Act (TCJA) has passed and for the most part, people are excited. It means more money in the pockets of millions of individuals and corporations. However, nothing can be all sunshine and roses, so along with the good changes, there are some bad bits and some downright ugly impacts.
Below are the changes in the TCJA that I think are the most interesting and impactful.
But before I get into that, a disclaimer: If you’re curious about how your taxable income will be impacted, here’s a tax calculator. Of course, I’m not your tax advisor and an online calculator can only do so much. You should consult with a tax professional for advice on your specific situation.
Lowers most individual rates
The tax bill still has seven tax brackets, but their distribution had changed slightly, and five of the seven rates are lower. Here’s a summary so you can see where you fall:
|Old Tax Bracket||Old Rate||New Tax Bracket||New Rate|
|Up to $9,325||10%||Up to $9,525||10%|
|>$91,900-$191,650||28%||>$82,500 – $157,500||24%|
|Married Filing Jointly|
|Old Tax Bracket||Old Rate||New Tax Bracket||New Rate|
|Up to $18,650||10%||Up to $19,050||10%|
Expands the benefits of 529 plans
529 plans are tax-advantaged savings plan that were previously reserved for college savings. The new bill allows them to also be used for K-12 education. If your children are in private school, this could benefit you.
Substantially increases the standard deduction
Every taxpayer gets to choose between the standard deduction and itemizing their deductions. This is money you essentially get tax-free because the IRS recognizes that we all need a certain amount of money for basic expenses. If your itemized deductions exceed the standard deduction, you should itemize. Otherwise, you take the standard deduction.
The standard deduction used to be $6,350 for single filers and $12,700 for those married filing jointly (MFJ). Now it has almost doubled to $12,000 for single filers and $24,000 for MFJ.
If you’ve chosen to itemize deductions in the past, you may find that taking the standard deduction going forward will benefit you more.
Increases the child tax credit
The bill doubles the child tax credit from $1,000 to $2,000. Note this is per qualifying child. It also raises the income threshold for this credit from $75,000 to $200,000 for single parents and from $110,000 to $400,000 for married couples. The result is that many more taxpayers will qualify for this credit.
Lowers the corporate tax rate
This is probably the most impactful change in the TCJA. The corporate tax rate plummets from 35% to 21%. This means businesses will have more to spend on technology, infrastructure and personnel. This should lead to higher earnings, and hopefully greater returns for investors.
Limits state and local deduction
Previously, the deduction for state and local taxes was unlimited. The new act caps the deduction at $10,000. It’s only available to taxpayers who itemize, so this change will most likely negatively impact higher income households with high property taxes the most.
Reduces the mortgage interest deduction
When you take out a new mortgage on a first or second home, you’re allowed to deduct the interest on that debt up to a certain threshold. The act drops that threshold from $1 million down to $750,000. This doesn’t impact homeowners who already have a mortgage.
Eliminates personal exemptions
Previously, a $4,050 personal exemption was available for the taxpayer, their spouse, and each of their dependents. The act eliminates these. Thanks to the increased standard deduction, many taxpayers won’t be too upset about losing their personal exemption (both lower taxable income). However, if you have a big family, you probably won’t be happy about this one.
Eliminates the deductibility of alimony
If you pay alimony to an ex-spouse, you’re probably used to being able to deduct it. Beginning in 2019, alimony will no longer be deductible. Note this is for new orders, and existing orders will be grandfathered.
Increases the national debt
Have you seen the U.S. debt clock? It’s terrifying. The U.S. government is currently in debt by more than $20 trillion and it’s still going up. This clock tracks its progress. The nonpartisan Joint Committee on Taxation estimated that the act will add $1 trillion to the deficit, even after they considered the estimated impact of economic growth due to the tax changes.
Eliminates the penalty for not buying health insurance
From 2019 onwards, taxpayers won’t have to pay a penalty if they choose not to have health insurance
I struggled with this change’s category. Whether it’s good, bad or ugly depends on your situation.
Scenario 1: You’re a healthy individual who chooses not to purchase health insurance. You remain healthy and spend very little out of pocket on healthcare. Good.
Scenario 2: You choose not to purchase health insurance. You have a medical event and have to pay (a potentially very large sum) out of pocket for healthcare. Bad.
Scenario 3: You are a healthy or an unhealthy individual who purchases health insurance through the exchange. Your premiums (which are already extremely high) increase because fewer healthy people choose to purchase insurance. The marketplace is your best option for health insurance, so you’re forced to pay the higher premiums. Ugly.
So there you have it – a very high level run down of some of the most impactful changes in the Tax Cuts and Jobs Act.
What do you think of the TCJA? Which change will impact you the most?