With the New Year come new tax laws. The new tax law, commonly called the “Tax Cuts and Jobs Act,” is the biggest Federal tax law change in over 30 years. Below are some significant changes affecting individuals. Except where noted, the changes are effective for tax years beginning after Dec. 31, 2018.
Seven individual tax rates. The tax rates will be: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. The top rate of 37 percent would be assessed on income over $612,350 for married couples and $510,300 for single taxpayers. Note that this is also the level at which the highest long-term capital-gain rate (i.e. 20 percent) kicks in.
Increased standard deduction. The standard deduction will increase to $24,400 for a joint return, $18,350 for an unmarried individual with at least one qualifying child, and $12,200 for single filers. Personal exemptions are eliminated. Because of the larger standard deduction, many taxpayers will no longer itemize their deductions.
Alternative minimum tax (AMT). The bill increases the AMT exemption amounts to $111,700 for married filing jointly taxpayers, $71,700 for single taxpayers, and $54,700 for married filing separately. The bill also increases the AMT phase-out exemptions for $1,020,600 for married taxpayers filing jointly and $510,300 for single taxpayers. It is estimated that only 200,000 taxpayers will be impacted by the AMT rules.
Medical-expense deduction. The Secure Act passed late in 2019 reverts the medical-expense deduction floor from 10 percent to 7.5 percent of your adjusted gross income (AGI).
Mortgage-interest deduction. The mortgage-interest deduction will be allowed for debt up to $750,000 on debt incurred after Dec. 15, 2017. Mortgages incurred prior to the Dec. 15, 2017, are grandfathered and subject to the $1-million limitation. The deduction for home-equity interest is eliminated, unless used to substantially improve one’s main home. The Tax Policy Center estimates that the number of returns claiming the mortgage-interest deduction for 2019 will drop to 16 million.
State and local income tax and real-estate-tax deductions. The state and local deduction is now grouped together with real- estate tax deduction. Taxpayers may elect to deduct sales, income or property taxes up to $10,000 ($5,000 for married filing separately).
Charitable-contribution limitations will be increased on cash contributions. This is increased to 60 percent of AGI. The Tax Policy Center expects only 16 million filers to take advantage of this deduction for tax year 2019, down from 36 million before the enacting of this law,
Miscellaneous itemized deductions. These deductions, normally subject to 2% of your AGI, will be suspended until 2026.
This bill eliminates various deductions such as tax preparation expenses, union dues, investment management fees, and unreimbursed business expenses.
Regardless of your income tax bracket, it is very likely the TCJA will impact you in your filing for 2019 and the years that follow. Additional changes that will affect taxpayers for this filing year will be discussed next week.
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or firstname.lastname@example.org.
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