Thirteen months ago, President Trump made headlines by signing our country’s largest tax overhaul in 30 years into law. Now that we can actually feel the impacts of the Tax Cut and Jobs Act (TCJA), have they made a huge difference in our bank accounts, or were those promises just fake news? Here is a look at some of the law’s major changes—and how they may affect your tax returns.
Tax brackets look completely different
The TCJA caused most tax brackets to go down. You can see a breakdown of the new 2018 rates here. Paying less is a good thing, except when it shifts your tax withholding too low and you end up paying less per paycheck than you should. Typically, you can avoid tax penalties by paying at least 90 percent of what you owe throughout the year. But, because of this year’s confusion, the IRS recently offered to drop the threshold down to 85 percent.
The standard deduction is twice the size
Every year, you choose one of two ways to lower your tax bill—the standard deduction or itemized deductions. The standard deduction is a lot bigger now: $12,000 for those filing single and $24,000 for married couples filing jointly.
If you opt to itemize, you’ll still be able to claim all of your deductions—like medical expenses, property taxes, mortgage interest, and gifts to charity—separately, but with the standard deduction increase, there may less motivation to do so.
There is a bigger tax credit for child care
There’s no doubt about it, raising kids is expensive. Before TCJA, exemptions for yourself and your dependents were one way to ease that financial burden. You simply claimed your number and lowered your tax bill. Now personal exemptions are disappearing until 2026. This goes for you, your spouse, and dependents and at $4,050 a pop, that’s going to sting a little.
Luckily, the new child tax credit gives you $1,000 more per child under the age of 17. Your dependents qualify if they live with you at least six months of the year. Consider it a small token of appreciation for your unpaid work as a parent.
Business owners get a break
Whether you are moonlighting on the side or a full-fledged entrepreneur, the TCJA offers a few different tax breaks. Primarily, there’s a new 20 percent deduction for certain types of businesses. You may be eligible if your taxable income is below $157,500, or $315,000 if you file with your spouse. If you aren’t sure if you qualify, it’s always best to speak with a tax professional.
Lower estate tax for high net worth families
For wealthy families who want to pass their fortune on, the TCJA has temporarily increased the exemption levels from estate tax. Estates worth $11.8 million or less are exempt from estate tax through 2025. If your estate is worth $11.8 million or less, you won’t have to pay estate tax through 2025.
Will the Tax Cut and Jobs Act actually pay off?
And what about the greater economy as a whole? While the jury is still out on TCJA’s long-term impact, a recent Brookings Institution report predicts only a small positive economic impact over time. We can expect to see a lot less revenue, which could put a strain on future generations. It’s possible we will also see increased income inequality.
The new law is both simpler and more complicated to deal with. The increased standard deduction may impact areas like housing, state and local spending, and charities. The report says it’s difficult to envision a healthy level of federal revenue—especially with so many provisions going away. Depending on the coming years’ political climates, it’s likely we will see some major debates and changes.