Change can be scary. Taxes can be scary. Tax changes can be really, really scary. Not only are taxes a complex issue to understand, but many times new legislation can be hard to understand. There are so many details within tax rules that you might be hearing some of these proposed tax plan changes and not know if that means it is better or worse for you. I want to emphasize that these changes will affect individuals and families very differently depending on your situation. Considering we all benefit from certain rules and exemptions, these changes will obviously create some positive and negative changes for every person. My goals with this article:
- Breakdown the current way your taxes are calculated
- Go over each topic that has a proposed change
- Show you exactly what the rules are now and what the proposed changes are
- Avoid any political or personal influence
- Use only facts and figures
I am sure that you all have read a ton of articles by newspapers and networks, but my goal is to take out any of my personal preferences when writing this and just stick to the facts of what is changing. You can create your own opinion based on the changes as to whether or not you think it will be positive or negative. So let’s get started! Read this article to get a good idea of how your taxes are calculated. If you feel like you have a good idea of how taxes are calculated and know all of the lingo, feel free to skip the article and keep reading below:
Now what are the Changes for Individuals?
The Big Ones that Everyone is Talking About:
- Tax Brackets:
- Here are the current tax brackets:
- Here are the proposed tax brackets:
- Standard Deduction: The standard deduction is getting a large increase, nearly doubling in most cases. The goal of the plan is to reduce the amount of filers who itemize their deductions. Here are the proposed changes:
- Personal Exemption: Currently, a person can claim a personal exemption for themselves, their spouse, and any children that they claim as dependents. Each of these exemptions is worth $4,050. This would be eliminated in the proposed plan, meaning large families with many children could be affected.
- Child Tax Credit: The child tax credit would increase in the proposed plan. An added benefit, a credit would be allowed for people caring for “non-child dependents.” It should be noted that only people with a work-eligible Social Security number will be allowed to claim the refundable portion of this tax credit.
- 401(K) Contributions: This was a highly debated topic. There were talks that the deductible portion of a filer’s contributions were going to be cut by thousands, but they decided not to touch this one. The limits for 2018 will stay at $18,500 per filer per year. It will be $24,500 for those 50 and up. There could be some implications with the requirements for rolling over contributions and criteria for distributions.
- Tuition Assistance: Workers and students that receive tuition breaks for working at education institutions will now have to include the total amount that is discounted as taxable income. This could drastically affect graduate students who work at universities and students who enjoy tuition breaks from their parents working at universities.
- Capital Gains on Home Sales: Currently, taxpayers can exclude up to $500,000 (filing jointly) or $250,000 (filing single) of capital gains from selling their house if they have lived in the house themselves for at least two of the past five years. For example, you buy a house for $100,000 and three years later (and you have lived in the house yourself all three years), you sell the house for $250,000, you can exclude that $150,000 gain from your taxes. Under the proposed plan, you must live in the home for five of the past eight years in order to exclude it.
- Estate Tax: Under the current rules, a person can inherit about $5.5 million in assets without having to pay tax on that amount. Under the proposed rule, the limit would double to nearly $11 million and would be eliminated entirely by 2024.
- Adoption Tax Credit: Under current rules, a filer can take a tax credit of up to $13,570 per child in the year the adoption takes place. This is to help new parents with the hefty costs of adopting a child. The proposed plan would eliminate this tax credit. *It should be noted that the version passed by the House has kept this credit alive.
- Obamacare Mandate: The House and Senate aren’t getting along over this change. The House bill that was passed would keep the mandate for individuals to have insurance coverage, whereas the Senate has promised to remove this. Stay tuned.
Above the Line Deduction Changes:
- Student Loan Interest: You are currently allowed to deduct up to $2,500 in student loan interest from your total income to get to your AGI. The new plan would eliminate this deduction.
- Tuition and fees deduction: You are currently allowed to deduct up to $4,000 worth of tuition and fees from your total income to get to your AGI. The new plan would eliminate this deduction.
- Interest on U.S. Savings Bonds: Currently, you can deduct any interest that you received on U.S. Savings Bonds if you used that money towards higher education expenses if you are under certain AGI thresholds. The new plan would eliminate this deduction.
- Alimony: Under current rules, those who pay alimony to an ex-spouse are able to deduct that amount from their income. Filers who receive alimony have to claim it as income (not child support). Under the proposed changes, those who pay alimony cannot deduct the amounts and those who received it will not have to claim it as income.
- Moving Expenses: If your job forces you to move and you must buy a new house as a result, you are able to deduct direct moving expenses (there are certain mileage requirements). Under the proposed plan, this deduction would be eliminated.
If You Itemize Your Deductions:
- Medical and Dental Expenses: Under current rules, you are able to deduct any medical and dental expenses that are over 10% of your AGI. Many families that have high deductible plans or family members that are sick use this deduction. Under the proposed plan, this deduction would be eliminated.
- Mortgage Interest: You are currently allowed to deduct mortgage interest on home loans up to $1,000,000. The new proposal will limit that amount to $500,000 for new mortgages, however existing mortgages will be grandfathered in with the existing limit.
- State and Local Taxes: You are currently allowed to deduct your property taxes, in addition to deducting both your state and local OR your sales taxes. The proposed plan would eliminate deducting both the sales/local tax and sales tax. It would also limit the property tax deduction to $10,000.
- Caps on Itemized Deductions: The cap on itemized deductions is $320,000 for married filing jointly, $293,350 for head of household, $266,700 for single and $160,000 for married filing separately. Under the proposed plan, these limits would be eliminated completely.
- Charitable Contributions: Currently, you can deduct your charitable contributions, up to 50% of your AGI. This limit would change to 60% under the new plan. It would also eliminate the ability to deduct your purchase of college event seating rights as a contribution.
- Tax Preparation Fees: Under the current plan, you can deduct any expenses that you incur to file your taxes, whether that is purchasing software or paying someone to prepare your taxes for you. Under the proposed plan, this would be eliminated.
- Casualty Losses: You can currently deduct any casualty loss expenses (think theft or fire). The expenses can only be for amounts that were not reimbursed by an insurance company, you must deduct $100 per incident, and then you can only claim what is over 10% of your AGI. This deduction would be eliminated under the proposed plan.
Tax Credit Changes:
- American Opportunity Credit: Taxpayers with AGI of $80,000 (single) or $160,000 (joint filers) and less can deduct up to 100% of their first $2,000 paid toward higher educational expenses (tuition, fees, and books) if they are in their first four years of higher education. It also allows for 25% of the next $2,000 paid towards those expenses, capping off for a total of $2,500. Up to 40% ($1,000) can be refundable. Under the proposed plan, the credit would remain and be expanded to include those in their fifth year of higher education, but limit that amount to $1,250.
- Lifetime Learning Credit: Taxpayers with MAGI (Modified Adjusted Gross Income) of $65,000 (single) or $130,000 (joint filers) and less can deduct up to 100% of their first $2,000 paid toward higher educational expenses (tuition, fees, and books). There is no limit on the number of years that you can claim this credit and it does not have to be within the first four years of higher education. You cannot claim both of these. Under the proposed tax plan, this credit would be eliminated.
- Elderly/Disabled: Under current rules, you can qualify for this credit, which ranges from $3,750 to $7,500, if you are either 65 or older by Dec 31st, or you are retired and live on permanent disability income. You have to be under certain income thresholds for both regular income and social security. Under the proposed plan, this credit would be eliminated.
- Plug-In Electric Drive Vehicle: You are currently able to qualify for a tax credit between $2,500 and $7,500 depending on the size of the battery. The car must have been purchased in or after 2010, and must be claimed in the year of the purchase. This credit would be eliminated under the proposed tax plan.
Alternative Minimum Tax:
- AMT: The IRS makes filers basically calculate their tax liability twice. Calculating your AMT usually has you add back certain deductions to make sure that you are not getting to take too big of a tax break. Under the proposed plan, AMT would be eliminated.
Let’s Wrap This Up
I want to stress a few things again:
- It is currently being debated, but many of the individual tax changes, such as the lower tax rates and lower and increase in standard deduction are set to expire at the end of 2025. The individual Obamacare mandate would be permanently eliminated.
- This list is changing every day as the bills are being debated
- This is not a comprehensive list. There are additional deductions being eliminated and breaks being added, but these are the big players.
- AGI limitations could be different whether you are looking at your 2017 taxes or prospectively to your 2018 taxes.
- This bill will affect literally every single person in the country who pays taxes, but whether it will be positive or negative will depend entirely on your situation.
Now what are the Changes for Businesses?
- Corporate Tax Rate: The proposed plan would cut corporate tax rates from 35% to 20%. These tax cuts would not be subject to an expiration date, effectively making them permanent.
- Global Taxation: Currently, all profits are subject to domestic taxes. The proposed plan would try and shift into a more territorial system, where profits made from business operations outside of the U.S. and “earned” outside of the U.S. could be excluded from domestic taxation.
- Pass-through” Business: Most businesses in the U.S. are not set up as corporations, but partnerships and proprietorships. This means that the income from their businesses are passed-through to their personal individual tax filing. The goal is to reduce the top tax rate on these individuals down to 25% with the new proposed plan. The proposal also has these cuts expiring at the end of 2025.