This is the first of a series of articles concerning the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017. In this article, we provide an overview of some key areas of the new Act. Be sure to watch for periodic updates where we will go into more depth on how specific features of the Act may affect you, such as: mortgages, personal income, health care, investments, college savings, and large purchases.
While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.
Individual income tax rates
The legislation replaces most of the seven, current marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts, and replaces existing "kiddie tax" provisions (under which a child's unearned income is taxed at his or her parents' tax rate) by effectively taxing a child's unearned income using the estate and trust rates. New tax rates for 2018 and beyond.
Standard deduction and personal exemptions
The legislation roughly doubles existing standard deduction amounts, (Single or Married Filing Separately - $12,000, Head of Household - $18,000, and Married Filing Jointly - $24,000) but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.
The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the "Pease limitation") is repealed, and the following changes are made to individual deductions:
Child tax credit
The child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17.
Alternative minimum tax (AMT)
The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.
Other noteworthy changes
USAA is here to help by providing additional information and guidance on your specific financial needs and goals as we evaluate the impact of the tax bill in 2018 and beyond. We’re committed to helping you make smart financial decisions all along the way.
Visit USAA’s Tax Center for information and resources. You can also speak with an advisor by calling 800-531-8722.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for noncompliance are severe and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.
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