How the Tax Cuts and Jobs Act Impacts U.S. Tax Returns

October 24, 2017 : Kathy Pickering - Executive Director, The Tax Institute

Editor’s Note: This article was originally published on December 20, 2017.

 

With the passage of the tax reform bill, called the Tax Cuts and Jobs Act, you’re probably wondering how your taxes will be affected. The following article is the analysis by our experts at H&R Block.

Three highlights you need to know:

  • Virtually all taxpayers are impacted by the changes in the tax reform legislation
  • Those who itemize will have fewer expenses to deduct and a higher standard deduction threshold to cross
  • Changes to child-related tax benefits impact families

Review the article below and find more information in our Tax Reform Center to identify how these tax reform changes will affect you in 2018 and beyond.

How does tax reform affect you?

Virtually All Taxpayers Are Affected by Changes in the Tax Reform Bill  

The Tax Cuts and Jobs Act (TCJA) was passed into law at the end of 2017 and made changes that affect all kinds of taxes – individual, corporate, partnership and other “passthrough” business entities, estate, and even tax-exempt organizations.

While this article looks at tax changes for individuals, you can also find information about the new qualified business income deduction for pass through entities as part of our coverage.

When Does the TCJA Take Effect?

Most changes from the Tax Cuts and Jobs Act took effect on January 1, 2018 and are slated to sunset after December 31, 2025. However, there are a few provisions from the new tax law that have a 2019 effective date and some are retroactive.

Tax Brackets and Tax Rates Change for Most Taxpayers With the TCJA

Individual tax filers will pay tax using a new tax bracket and tax rate structure. However, the tax rates remain progressive, meaning tax rates rise as income increases.

In comparison to previous tax brackets and tax rates, the new rates due to the Tax Cuts and Jobs Act are slightly lower and the brackets are generally slightly broader.

 

Rates under the TCJA Pre-TCJA rates
10%, 12%, 22%, 24%, 32%, 35%, 37% 10%, 15%, 25%, 28%, 33%, 35%, 39.6%

 

Under the 2017 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739.

Under the 2018 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.

Going forward, the brackets will be adjusted based on a different inflation measure – the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) –  that is expected to grow more slowly than the previous inflation measure.

While most taxpayers will pay less, some taxpayers will pay a slightly higher tax rate under the TCJA. This is most likely to impact an upper-middle class individual with a marginal tax rate of 35%, up from 33%.

Tip: Tax brackets, rates and credits play a big part in how much tax a taxpayer will pay, but the amount of taxable income plays perhaps an even bigger role.

Tax Reform Makes Changes to Exemptions and Credits

Personal and Dependent Exemptions Are Eliminated

In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative. Each exemption reduced taxable income by $4,050 in 2017. Under the TCJA, personal and dependent exemptions are eliminated from 2018 through 2025.

Child Tax Credit Increased

Starting in 2018, the TCJA increases the maximum child tax credit from $1,000 to $2,000 per qualifying child. The refundable portion of the credit increases from $1,000 to $1,400 and the earned income threshold for claiming the refundable credit is lowered from $3,000 to $2,500. That means taxpayers who don’t owe tax can still claim a credit of up to $1,400. The higher child tax credit will be available for qualifying children under age 17, as under previous law.

Also, the child tax credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) of over $200,000 or $400,000 (MFJ). This phaseout more than doubles the phaseout range under previous law. Taxpayers can’t claim a child tax credit for a child who does not have a Social Security Number (SSN) by the due date of the return.

New Credit for Other Dependents Available

Starting in 2018, the TCJA allows a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit. Taxpayers can claim this credit for children who are too old for the child tax credit, as well as for other dependent relatives, such as parents.

There is no SSN requirement to claim this credit, so taxpayers can claim the credit for children with an Individual Tax Identification Number (ITIN) or an Adoption Tax Identification Number (ATIN) if they otherwise qualify. Taxpayers cannot claim the credit for themselves or their spouse (if Married Filing Jointly).

As with the child tax credit, the new credit is available only for U.S. citizens, nationals, or residents. Dependents who reside in Canada or Mexico (unless they are U.S. citizens) may not claim the credit. 

Tax Reform Bill Also Changes Standard and Itemized Deductions

 Standard Deduction Increases

The standard deduction has increased. In 2018, the new standard deduction amounts are:

  • $12,000 (single)
  • $18,000 (head of household)
  • $24,000 (married filing jointly)

Because of the increase to the standard deduction and because of changes to the rules for itemized deductions from tax reform, many taxpayers who previously itemized deductions will now claim the standard deduction instead. This means they would not have to file Schedule A. However, taxpayers may want to continue to track their expenses, so they have the information to make the comparison and choose the tax benefit with the bigger value.

Many Itemized Deductions Eliminated, Limited or Modified

Before the tax reform bill took effect, about 30% of taxpayers itemized deductions on Schedule A, instead of taking the standard deduction associated with their filing status. However, the TCJA has a large impact on itemized deductions, as several itemized deductions have been eliminated or modified.

Wondering How Tax Return Changes Will Affect You in 2018?

One taxpayer’s situation will be different from the next. If you’re curious to find out how tax reform will affect you, get an estimate from our tax return and tax reform calculator and make an appointment to visit with a tax professional. He or she will help you navigate the new tax laws.

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Kathy Pickering - Executive Director, The Tax Institute

Kathy Pickering - Executive Director, The Tax Institute

Kathy is the executive director of The Tax Institute at H&R Block. With more than a decade of experience in tax operations and 25 years in information technology, Pickering is responsible for the strategic direction and management for a team of the nation's top experts on tax issues. Prior to joining H&R Block, Pickering worked with Sprint PCS, Olsten Health Services and various consulting firms where she focused on implementing accounting and financial systems, and leading Enterprise Resource Planning (ERP) software implementations, such as JD Edwards and PeopleSoft software.