The United States House of Representatives and Senate approved the Tax Cuts and Jobs Act (TCJA) in December 2017. This legislation will affect both individuals and businesses in the foreseeable future. And for those who fail to plan accordingly, they risk costly, time-consuming tax errors. Perhaps even worse, those who fail to comply with TCJA risk penalties.
Ultimately, it is beneficial to learn about TCJA and what it means to you. To better understand TCJA, let's take a look at five of the law's key provisions.
1. Individual Income Tax Rates
Seven individual income tax brackets remain intact under TCJA. However, the act has changed tax rates and thresholds. The IRS now provides updated tax brackets under TCJA, and these brackets will take effect for the 2018 tax year and stay in place until 2025. At that time, the tax brackets will no longer apply unless Congress takes further action.
2. Standard Deduction
Many people are all too familiar with the standard deduction, i.e. an amount that can be deducted from a person's income before his or her tax liability is calculated. In the 2017 tax year, the standard deduction was $12,700 for married couples filing jointly, $6,350 for single taxpayers and $9,350 for heads of households. Going forward, the standard deduction increases to $24,000 for married couples filing jointly, $12,000 for single taxpayers and $18,000 for heads of households. The increased standard deduction will remain intact until 2025.
3. Personal Exemption
A personal exemption refers to the amount that you can deduct from your income based on each taxpayer and most dependents claimed on your return. Taxpayers previously were entitled to a personal exemption of $4,050 per person. Now, the personal exemption has been eliminated until 2025.
4. Child Tax Credit
A child tax credit once enabled married couples filing jointly who earned less than $110,000 annually to receive a tax credit of up to $1,000 for each child under the age of 17. Under TCJA, the child tax credit increases to $2,000 per child. Additionally, the first $1,400 of this total is refundable; this means you can use the credit to lower your tax liability below zero and still be eligible to receive a tax refund. The child tax credit also has increased to $400,000 for married couples filing jointly. Meanwhile, the expanded child tax credit will remain in effect until 2025.
5. Mortgage Deduction
In the past, mortgage holders could deduct interest on mortgage debt up to $1.1 million. With TCJA, the mortgage deductible limit falls to $750,000 for new debt incurred after Dec. 31, 2017. Furthermore, homeowners cannot claim a deduction for any existing or new interest on home equity debt starting Jan. 1, 2018. The TCJA's mortgage deduction changes will expire after 2025.
Spend some time studying TCJA and learning about all aspects of the law – you'll be glad you did. If you understand how TCJA will affect your taxes, you can find ways to maximize your tax deductions.