The newly-enacted IRS’ Tax Cuts and Jobs Act includes many changes effective in 2018. Some are good and some are bad, depending on how you look at it.
There has been a lot of publicity around the reduction in corporation income tax rates, from 35% to 21%. That’s a positive for certain taxpayers, but it has minimal impact on most small businesses and individuals.
Here are the critical things that will affect most of us
- Dependency exemptions, which are $4,150 per dependent in 2017, are completely eliminated. That means an increase of $16,600 to taxable income for a family of four.
- The itemized deduction for taxes has been capped at $10,000. That includes real estate taxes and state and local income taxes, including those withheld from your paycheck.
- Home mortgage interest will only be deductible on a maximum of $750,000 of new debt (existing loans of up to $1 million are grandfathered), and the deduction for home equity loan interest has been eliminated. For those who don’t itemize, the standard deduction has been doubled from $6,000 to $12,000 per person.
- The child tax credit – for children under the age of 17 – has been doubled to $2,000.
- Individual income tax rates have been reduced across the board.
- There is a new deduction for 20% of income derived from self-employment and other pass-through entities such as partnerships and S corporations, but it’s subject to a number of contingencies.
So, what is my personal takeaway from all of this?
The biggest impact is the elimination of personal exemptions.
Our legislators apparently decided that the doubling of the child tax credit offsets that. but the loss of the $4,150 deduction for dependents over the age of 17 will hurt, particularly for families with children in college. And the reduction in itemized deductions for mortgage interest and taxes is hardly compensated by the increased standard deduction.
All in all, this is not a “tax cut” for many of us.