What Every Taxpayer Needs to Know About the New Tax Law

A rundown of the winners, the losers and the mixed results for most taxpayers.

What You Need to Know About the New Tax Law

The end of 2017 was a scramble, as taxpayers and tax preparers rushed to interpret the new tax law and take any action they could while soon-to-disappear tax deductions were still in place (they weren’t always successful).

Now that the first filing season of the new tax law is here, how will the tax law change what you pay in 2019 and beyond?

The new tax law has provisions impacting taxpayers, both positively and negatively, across all income levels. Let's dive in...

Temporary Individual Tax Cuts

Here’s something that’s important to keep in mind upfront: the provisions related to corporations are permanent, while those affecting individual taxpayers expire in 2025.

As a result, many individuals will hold onto more of their paychecks in the near term, thanks to the new tax bracket levels and several increased tax credits. However, the tax brackets will return to their previous rates after 2025, while many tax credits will expire. Depending on your personal situation, your taxes may increase considerably in 2026.

New Tax Brackets

There are still seven tax brackets, but they’ve been adjusted slightly: 10, 12, 22, 24, 32, 35, and 37 percent.

Compare those to the 2017 tax brackets: 10, 15, 25, 28, 33, 35, and 39.6 percent.

“For many people, this will end up being a tax reduction,” said John McCarthy, a certified public accountant andfounder of McCarthy Tax Preparation in Cincinnati.

While middle-income taxpayers will benefit, they’ll do so proportionately less than high earners. For example, a household earning $50,000 to $75,000 will receive an average tax cut of $870, while a household earning $500,000 to $1 million will receive an average tax cut of $21,240.

“This is definitely a plan that is going to help the higher-income individual and corporations,” said Anthony Badillo, a certified financial planner and chartered financial consultant. “The top tax rate is reduced. It may seem small, but it’s a big difference for high salaries.”

Tick Tock

And don’t forget that these new tax rates will expire after 2025 and return to what they were in 2017, right when many tax credits and deductions for individuals will expire as well. This has the potential to suddenly increase your tax bill in 2026, depending on future legislation. In short, enjoy your lower tax burden for now, but be prepared for it to increase in several years.

Standard Deduction and Personal Exemption

“Some of the biggest changes that affect the everyday taxpayer will be around itemized deductions,” McCarthy said. For many lower- and middle-income taxpayers who previously chose to itemize, changes to the standard deduction and personal exemption will make taking the standard deduction a better choice.

That’s because the standard deduction has almost doubled, from $6,350 to $12,000 for single filers, from $12,700 to $24,000 for married couples filing jointly, and from $9,550 to $18,000 for heads of households.

At the same time, the personal exemption of $4,050 per taxpayer, spouse, and dependent is going away this year. Rosa sees this change negatively impacting families with children. “A family of five was able to take $20,250 of personal exemptions plus the standard deduction,” he said. In 2017, that would have amounted to a $32,950 deduction. This year, that same family would would only get the $24,000 standard deduction.

Doing the Math

However, single and married taxpayers without children come out on top. A single filer in 2017 would have received a $10,400 deduction (the standard deduction plus the personal exemption). Now they’d get a $12,000 deduction. Married filers, meanwhile, would have received a $20,800 deduction in 2017, but will get a $24,000 deduction this year.

Income Tax and Property Tax Deduction

A major change to the tax law is the $10,000 cap on the state and local income tax and property tax deduction.

This new rule will strongly affect residents of high-tax states like New York and California, especially since this deduction used to be unlimited.

The 2017 Rush to Prepay

Taxpayers rushed to pre-pay their 2018 property taxes before the end of the year, until the IRS ruled that only homeowners whose property taxes have been assessed in 2017 (meaning the value of the home had been re-determined for tax purposes) could pre-pay.

While many cities assess properties annually, others only do so every other year.

Other Changes Affecting Homeowners

Residents in cities with high real estate values have been eyeing this change closely: Before Dec. 15, 2017, homeowners could deduct the interest payments on a mortgage of up to $1 million.

If you take out a home loan this year, the cap for mortgage interest deductions has been lowered to $750,000. This provision isn’t permanent, though, and the cap returns to $1 million in 2026.

Primary Mortgages vs. Home Equity Loans

“One thing I haven’t seen a ton of press on is the changes around home equity interest deductions,” McCarthy said. “Those are going away completely.”

Homeowners who take out a home equity loan used to be able to deduct the interest on loans of up to $100,000, and that is no longer the case. Also, since this rule isn’t grandfathered, you can’t write off the interest in 2018 from a loan you took out last year.

The Child Tax Credit

While the elimination of the personal exemption is a hit to parents’ bottom lines, the increased child tax credit can hopefully soften the blow somewhat.

Until 2025, the child tax credit has doubled to $2,000 per child with no limits on the number of kids in a family who can receive the credit. There’s also a $500 credit for non-child dependents in your household.

New Criteria

The income limits for parents have increased, as well. The tax credit phases out for single parents who earn $200,000, up from $75,000, and for married parents earning $400,000, up from $110,000.

More Flexible 529s

There’s good news for parents who want to save for their children’s educations in a tax-advantaged way: 529 plans are no longer just for qualified college and graduate school expenses.

You can now also use them to pay for up to $10,000 in private school tuition per year for students in kindergarten through 12th grade.

“If you plan to send your kid to private school, start a 529 immediately,” Badillo said. He also offered this life hack: “If you really want to start early, you can open a 529 in your name, start saving in it, and then when your child is born, transfer it to their name once they have a social security number.”

More on 529s

Keep in mind, 529 plans weren't designed to help with private school tuition -- they're primarily used as a tool to help with college payments. Struggling to find funds to pay for college is not atypical for families, according to Sallie Mae, the student loan company. According to Sallie Mae’s national study, “2017: How America Pays for College,” while 86 percent of families expect their child to go to college only 39 percent have made plans to pay for it.

If you’re looking to learn more about 529 plans, you can research and compare different states’ plans here.

Benefits to Businesses

Owners of pass-through businesses (sole proprietorships, S corporations, and LLCs) will benefit from a new provision that allows them to deduct 20 percent of their business income.

Meanwhile, corporations will enjoy a capped flat tax rate of 21 percent, whereas before the top marginal corporate tax rate was 35 percent.

Taxes will increase for any corporation with profits under $50,000 (before, their tax rate was 15 percent), but corporations earning more than that will now pay lower taxes.

Unlike many of the provisions that expire at the end of 2025, these changes in the corporate tax rate are permanent.

A Note for Freelancers

Many freelancers may opt to set up an entity for their business this year in order to take advantage of these taxdeductions. The cuts may expire in 2025, but the costs to set up a business entity may be low enough to justify the upfront expense.

Alternative Minimum Tax

“Unbeknownst to a lot of people, the US tax code runs two separate parallel systems at once,” Rosa explained. “One is regular income tax, and one is alternative minimum tax. Alternative minimum tax was designed to prevent higher-income taxpayers from using certain deductions.”

He added, “It’s even confusing to tax preparers, believe me.”

Basically, the alternative minimum tax is a supplemental tax that’s imposed in lieu of regular income tax if an individual’s, corporation’s, or estate’s tentative minimum tax exceeds regular tax.

New AMT Income Levels

The income threshold for who is subject to alternative minimum tax is increasing to $70,300 for singles, up from $54,300, and to $109,400 for married couples, up from $84,500.

Increased Estate Tax Exemption

The tax plan doubles the amount of money that’s exempt from estate tax to $11.2 million for individuals and $22.4 million for married couples. This will sharply decrease the number of taxable estates until the provision expires.

States and Estate Taxes

However, keep the state in which you reside in mind.

“Most people aren’t going to run into any estate tax limitations at the federal level. You still do have to watch your individual state rules around that,” McCarthy said. “You may still pay estate taxes at the state level.”

The Disappearing Individual Mandate

The individual mandate, a component of the Affordable Care Act that imposes a fine on anyone who goes without a minimum level of health insurance coverage, has been repealed for 2019 as part of the new tax law.

Opponents of the individual mandate believe that no one should be forced by the government to enroll in the health insurance marketplace if they aren’t eligible for coverage through their employer.

The Downside

However, without the individual mandate in place, the Congressional Budget Office estimates that 13 million people will be uninsured by 2027.

Healthier (and therefore less expensive to insure) people are more likely to opt out of insurance coverage, raising premiums for those who remain in the insurance exchange.

Regarding Your Ex-Spouse

Right now, alimony payments are tax deductible to the spouse who pays them, and are taxed as income to the recipient.

Generally, the recipient is in a lower tax bracket than the payer, so the money is taxed at a lower rate.

This tax deduction has encouraged people to financially assist their ex-spouses, particularly if those ex-spouses weren’t the main breadwinners.

More Than Just Love Lost

For any divorces taking place after Dec. 31, 2018, the alimony deduction will be gone, creating the potential for more difficult and acrimonious divorce settlements in the future.

Other Deductions Affected

A few deductions that were on the chopping block for a time have been preserved, while others are gone. Namely, the student loan interest deduction, which was especially popular with younger taxpayers who are still paying back their student loans (you can calculate your student loan interest deduction here), was kept.

It’s not all good news for college students and their parents, though. Eligible taxpayers can no longer deduct up to $4,000 in tuition and fees for qualified higher education costs, as that credit has expired and wasn’t renewed as part of the tax bill.

If You Work for Someone Else

Taxpayers who work for someone else are losing a deduction this year. You’ll no longer be able to deduct unreimbursed business expenses, like when you use your personal phone or car for work and your employer doesn’t cover the cost.

Turbotax Gets More Expensive

Likewise, you can no longer deduct tax preparation fees. So while you may want to hire an accountant or other professional tax preparer for help in this confusing time, you can’t knock their fees off your taxable income.

Medical Expense Deductions

The new law maintains a deduction that allows people with very high medical costs (over 7.5% of their adjusted gross income) to reduce their taxable income by subtracting certain medical expense. The criteria to qualify for this reduction jumps up to 10% of adjusted gross income in 2019.

In the Near Term

For 2017 and 2018, you can deduct medical expenses in excess of 7.5 percent of your adjusted gross income. In 2019, you’ll only be able to deduct expenses in excess of 10 percent of your AGI. This only affects taxpayers who itemize their deductions.

The Winners and Losers

Most individuals will win in the short term, as tax rates decrease until the end of 2025. Business owners and corporations will reap big benefits under the new tax bill, as well. The increased child tax credit is a boon for parents, but it doesn’t totally offset the loss of the personal exemption. Large families will be especially hurt by this.

Ultimately, it looks like the big winners are the highest earners.

“My overarching view is that this is a tax bill that is clearly for the wealthy. I mean, there’s just no ifs, ands, or buts about it,” Badillo said. “The fact is, for most middle-income Americans, yes, they’re going to pay less in taxes, but it’s also proportionately less than higher-income Americans. What concerns me is a lot of the tax credits and deductions that benefit middle-income Americans are going to expire.”

“It’s adding $1.5 trillion to national debt,” he added. “And in my opinion, that is not fiscally responsible.”

Looking to the Future

What should Congress do in the near future, when many of these credits and deductions are set to expire and the tax rates will increase?

“The only thing that the next administration could do is really put this back through legislation. They’re going to have to fix it and make it more equitable and fiscally prudent,” Badillo said. “Go through a true legislative process and not rush through it in six weeks. It needs to be hashed out better.”

Want to Learn More?

- What the New Tax Law Means for Small Businesses

- What Families Need to Know About the New Tax Law