The Tax Jobs and Cuts Act of 2017 won't change anything when you file your taxes this April, but the tax code overhaul will make a difference when filing next year. One of the biggest changes is that a higher standard deduction means fewer taxpayers will likely itemize deductions.
"The new tax plan has nearly doubled the standard deduction -- from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married couples," said Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, New York. "With the increase in standard deduction and the elimination of many deductions, it will make more sense for most taxpayers to take the standard deduction instead of itemizing."
For itemizing to make sense, total itemized deductions need to be more than the new standard deduction. For many people, that means a simplification.
"Where one itemized in the past, the higher standard deduction might give them more of a deduction, so they may have an easier tax return and be fine on their own," said Abby Eisenkraft, an enrolled agent and chief executive officer of Choice Tax Solutions in Shoreham, New York.
With the increase in deduction and even with personal exemptions phased out, "it's still a really nice tax break," Eisenkraft said. Plus, there is an additional amount for those who are blind or over 65 years of age: $1,600 if unmarried, and $2,600 if married filing jointly, Eisenkraft said.
People who own small businesses will want to work with a tax pro, Eisenkraft said.
"Sole proprietors, LLC members and S-corp owners who aren't considered 'personal service' can claim a 20 percent deduction of their business income" if their income is under $157,500 for single taxpayers or $315,000 for married joint filers, Zimmelman said.
Withholdings may change
"Many taxpayers can expect to see changes in their paycheck after their employers adjust their withholding. Many will see less tax withheld under the new law," Zimmelman said.
Additionally, the personal exemption and dependent exemptions are eliminated entirely under the new tax plan, Zimmelman said.
"The personal exemption goes from $4,050 to $0," Eisenkraft said.
New tax brackets
In 2018, the tax rate for six of the seven tax brackets will be lowered, Zimmelman said. The lowest tax bracket will stay at 10 percent. The rates will go from 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent to 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
"Under the new plan, the threshold for deductible medical expenses drops from expenses over 10 percent of adjusted gross income to those over 7.5 percent. The penalties for lack of health insurance coverage will be eliminated," Zimmelman said.
The Child Tax Credit will double to $2,000 per child up to age 16, Zimmelman said. The credit phase-out is also raised from $110,000 to $400,000.
All current homeowners can still deduct mortgage interest on loans up to $1,000,000. However, the deductible amount drops to $750,000 for new-home purchases, Zimmelman said.
Alimony payments are no longer tax-deductible and received alimony is no longer considered taxable income, Zimmelman said.