Now that the dust has settled since the passage of the Trump tax reform legislation, here are some of the highlights that will impact people the most:
The government kept seven marginal income tax brackets in place, but reduced almost all of them. The previous 15% and 25% tax brackets, which most taxpayers landed in, came down to 12% and 22%, respectively. The top tax rate was reduced from 39.6% to 37%. Overall the new tax brackets are now: 10%, 12%, 22%, 24%, 32%, 35% and finally 37%.
The new legislation roughly doubled the standard deduction, from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for married filers. That’s a nice tax cut for most people as 70% of Americans currently do not itemize and just take the standard deduction.
There is no longer a deduction for personal exemptions. However, the child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The income at which the credit begins to phase out increased significantly to $400,000 for married filers and $200,000 for single filers.
Itemized deductions:
Individuals can now only claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
As far as the home mortgage interest deduction, individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt.
The miscellaneous itemized deduction, subject to the 2% adjusted gross income (AGI) threshold, which included tax-preparation and unreimbursed employee business expenses, is no longer deductible.
The unreimbursed medical expense deduction was kept. Not only that, but the AGI threshold for the deduction was retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns back to 10%.
Some other notable changes
The Affordable Care Act individual responsibility payment was permanently repealed starting in 2019. This was the penalty for failing to have adequate health insurance coverage.
The federal estate and gift tax exemption was almost doubled to about $11 million per person in 2018, and $22 million for married couples, with inflation adjustments in following years.
Also, starting in 2018, Roth conversions cannot be reversed anymore back to a traditional IRA if you change your mind.
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