Tax Cut and Jobs Act – Things to know!

January 18, 2018
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Tax reform was swept through at the end of 2017, with changes that will affect virtually all tax-paying adults in the country. Here is what you need to know about various tax brackets, thresholds, limitations, and exemptions for 2018.

After years of tax-reform talk and little action, the Republican-led Congress managed to overhaul the tax code in late 2017, enacting sweeping changes to tax rates and provisions likely to affect just about every tax-paying adult in the U.S. in 2018.

It would be a stretch, however, to say that the goal of simplification was achieved. While individual taxpayers might welcome the doubling of the standard deduction—a move likely to encourage more people to forgo the hassle of itemizing—they’ll still have to wrestle with seven tax brackets, the same number as in 2017.

And while some deductions were eliminated—most notably, perhaps, the eradication of personal exemptions and deductions for miscellaneous expenses and alimony payments, plus new limitations on deducting property taxes and state and local income taxes—others were maintained and even expanded. Consider that the rules for the medical expense deduction were eased: For 2017 and 2018, taxpayers’ medical costs need exceed only 7.5% of adjusted gross income, rather than the 10% threshold that had been the law.

One of the biggest changes likely won’t be noticed by most taxpayers: the law changes the way that inflation adjustments are calculated, relying on the chained consumer price index, which tends to rise more slowly than the previous measure used, the consumer price index. Over time, that will increase individuals’ tax bills as their income grows and the tax brackets are adjusted at a slower pace.

Taxpayers will need to be mindful, too, of the fact that numerous provisions were enacted temporarily, often sun setting at the end of 2025, while others were made permanent.

Table 1: 2018 Tax Rate Schedule

Taxable income ($) Base amount of tax ($) Plus Marginal tax rate Of the amount over ($)
Single
0 to 9,525 0 + 10 0
9,526 to 38,700 952.50 + 12 9,525.00
38,701 to 82,500 4,453.50 + 22 38,700.00
82,501 to 157,500 14,089.50 + 24 82,500.00
157,501 to 200,000 32,089.50 + 32 157,500.00
200,001 to 500,000 45,689.50 + 35 200,000.00
Over 500,000 150,689.50 + 37 500,000.00
Married filing jointly and surviving spouses
0 to 19,050 0 + 10 0
19,051 to 77,400 1,905.00 + 12 19,050.00
77,401 to 165,000 8,907.00 + 22 77,400.00
165,001 to 315,000 28,179.00 + 24 165,000.00
315,001 to 400,000 64,179.00 + 32 315,000.00
400,001 to 600,000 91,379.00 + 35 400,000.00
Over 600,000 161,379.00 + 37 600,000.00
Head of household
0 to 13,600 0 + 10 0
13,351 to 50,800 1,360.00 + 12 13,600.00
51,801 to 82,500 5,944.00 + 22 51,800.00
82,501 to 157,500 12,698.00 + 24 82,500.00
157,501 to 200,000 30,698.00 + 32 157,500.00
200,001 to 500,000 44,298.00 + 35 200,000.00
Over 500,000 149,298.00 + 37 500,000.00
Married filing separately
0 to 9,525 0 + 10 0
9,526 to 38,700 952.50 + 12 9,525.00
38,701 to 82,500 4,453.50 + 22 38,700.0
82,501 to 157,500 14,089.50 + 24 82,500.00
157,501 to 200,000 32,089.50 + 32 157,500.00
200,001 to 300,000 45,689.50 + 35 200,000.00
Over 300,000 80,689.50 + 37 300,000.00
Estates and trusts
0 to 2,550 0 + 10 0
2,551 to 9,150 255.00 + 24 2,550.00
9,151 to 12,500 1,839.00 + 35 9,150.00
Over 12,500 3,011.50 + 37 12,500.00

Source: House and Senate Conference Report (PDF p. 535)

Standard deduction. The tax-reform law almost doubles the amount of the standard deduction in 2018, to $24,000, from $12,700 in 2017, for married-filing-jointly filers; to $12,000, from $6,350, for single and married-filing-separately filers; and to $18,000, from $9,350, for head-of-household filers. This is a temporary change, effective only until December 31, 2025.

The tax reform law keeps the additional standard deduction amounts as they were for 2017. Thus, people who are blind or over age 65 receive an extra deduction of $1,300. The additional deduction for those who are blind or over 65 and unmarried (not a surviving spouse) is $1,600.

Table 2: Standard Deductions

Filing status 2018 2017
Single or married filing separately $12,000 $6,350
Married filing jointly and qualifying widow(er)s $24,000 $12,700
Head of household $18,000 $9,350
Dependent filing own tax return $1,050* $1,050

*Cannot exceed greater of $1,050 or $350 plus the individual’s earned income
Source: 
House and Senate Conference Report (PDF p. 538)

Personal exemption. The ability to take personal exemptions has been eliminated under the new law, a change which to some degree tempers the benefit of the higher standard deduction. In 2017, the personal exemption amount was $4,050. The provision to eliminate personal exemptions is scheduled to sunset after December 31, 2025.

Limitations on deductions. Before the Tax Cuts and Jobs Act, the Pease and PEP provisions reduced the value of deductions for wealthy taxpayers. The new law ends the limitation on deductions, but only until the end of 2025.

Capital gains and dividends. Tax rates on long-term capital gains and qualified dividends generally are unchanged, at 0%, 15% and 20%. For 2018, the 15% rate applies to capital gains or dividends that push taxable income above $77,200 for joint returns and surviving spouses, $51,700 for heads of household, $38,600 for single and married-filing-separately taxpayers, and $2,600 for estates and trusts.

The 20% rate applies to long-term capital gains or qualified dividends that propel taxable income past $479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married-filing-separately filers, and $12,700 for estates and trusts.

Tax on net investment income. Some high-income taxpayers owe the Net Investment Income Tax (NIIT) of 3.8%, which is levied on the lesser of net investment income or modified adjusted gross income over specific thresholds (see thresholds below). Net investment income includes taxable interest, ordinary dividends, capital gains and other income categories, and some expenses can be subtracted.

Table 3: 3.8% Tax on Lesser of Net Investment Income or Excess of MAGI Over

Filing status 2018
Married filing jointly $250,000
Single $200,000
Married, filing separately $125,000

Source: IRS Net Investment Income Tax FAQs

Deduction for medical expenses. The House of Representatives proposed entirely repealing the medical expense deduction, but the Senate’s proposal to expand the tax break won the day. Under the Tax Cuts and Jobs Act, for tax years 2017 and 2018, taxpayers who itemize can claim a deduction for medical expenses if those expenses exceed 7.5% of adjusted gross income, a decrease from the higher 10% threshold that had been required for 2017.

Sales tax deduction. Taxpayers who itemize can choose whether to deduct state and local sales taxes or state and local income taxes, but the Tax Cuts and Jobs Act limits the total deduction for property taxes, state and local income taxes, and state and local sales taxes (paid as an individual taxpayer, unrelated to a business) to $10,000 a year.

Alternative minimum tax. The Tax Cuts and Jobs Act temporarily increases the AMT exemption amounts. In 2018, the exemption amounts rise to $109,400 for married-filing-jointly taxpayers, up from $84,500 in 2017; $70,300 for single filers, up from $54,300 in 2017; and $54,700 for filers who are married filing separately, up from $42,250 in 2017.

The new amounts are indexed for inflation, and scheduled to sunset at the end of 2025. The new law doesn’t address estates and trusts, the exemption amount for which is scheduled to rise to $24,600 in 2018, up from $24,100 in 2017.

The 28% tax rate applies to income over $95,750 for people who are married filing separately and $191,500 for all other taxpayers. The exemption amounts phase out at income of $1 million for married-filing-jointly taxpayers and $500,000 for all others (except estates and trusts which, under existing law, phase out at $82,050 in 2018).

Kiddie tax. The Tax Cuts and Jobs Act subject’s children’s unearned income to the tax brackets for estates and trusts. For qualified unearned income up to $2,600, they pay 0% tax; on qualified unearned income from $2,600 to $12,700, they pay a 15% rate, and on qualified unearned income above $12,700, they pay a 20% rate.

Estate tax. The Tax Cuts and Jobs Act essentially doubled the amount excluded from tax, to $10 million for the estate of a person who dies in 2018 (indexed to inflation after 2011), up from $5.6 million in 2017. The top federal estate-tax rate remains 40%.

Gift tax. The value of gifts one person can give another without reporting it on a gift tax return is $15,000 in 2018, up from $14,000 in 2017.

Tax-free IRA distributions to charity. People aged 70½ or older can make tax-free distributions of up to $100,000 from an IRA directly to a charity. The distribution will count as a required minimum distribution.

Education credits & deductions. As lawmakers worked on proposals during the tax-reform process, it looked as though some education credits and deductions might be reduced or eradicated. For example, the initial bill approved by the U.S. House of Representatives would have repealed the Lifetime Learning Credit, ended new contributions to Coverdell accounts, and eliminated the rule that makes savings bond interest tax-free when used for higher education. However, the final law retained those provisions as well as much of the same education benefits as existed in 2017.

There are some changes that are of note: The new law allows up to $10,000 a year in 529-plan distributions to pay for qualified private-school K-12 education costs (excluding home-schooling), a provision which might encourage taxpayers to focus on 529 plans rather than Coverdell’s. (Previously, for a 529 distribution to be qualified, it had to be used for higher-education costs, whereas K-12 expenses have been a qualified expense for Coverdell plans.) The new law also allows rollovers from 529 plans to ABLE accounts for disabled beneficiaries until December 31, 2025.

American Opportunity Tax Credit. Taxpayers with qualified education expenses can reduce their tax bill by up to $2,500 (and the credit is partially refundable) thanks to the AOTC, if their modified adjusted gross income doesn’t exceed $80,000 ($160,000 for married-filing-jointly filers). At that income level, the credit starts to phase out. A partial credit is available to people with income up to $90,000 ($180,000 for married-filing-jointly). The credit is not available to taxpayers at incomes above $90,000 ($180,000).

Lifetime Learning Credit. This nonrefundable credit is worth up to $2,000. In 2018, the credit starts to phase out for taxpayers with modified adjusted gross income of $57,000 ($114,000 for married-filing-jointly filers). The Lifetime Learning Credit offers two main advantages over the American Opportunity Tax Credit: The LLC can be claimed for an unlimited number of tax years (the AOTC is limited to four tax years per eligible student) and the student doesn’t need to be pursuing a degree (the AOTC requires the student is pursuing a degree or other credential).

Student loan interest deduction. The House of Representatives proposed repealing this tax benefit, but the final law didn’t include that repeal. The student loan interest deduction allows taxpayers to reduce their income, via an above-the-line deduction that doesn’t require itemizing, by up to $2,500. The deduction starts to phase out once modified adjusted gross income reaches $65,000 ($135,000 for married-filing-jointly filers) and is unavailable to taxpayers with modified adjusted gross income higher than $80,000 ($165,000 for joint filers).

Tax-free savings bond interest. In 2018, the ability to enjoy tax-free interest from savings bonds that are redeemed to pay for higher-education costs starts to phase out for taxpayers with modified adjusted gross income of $79,700 ($119,550 for joint filers) and completely disappears for those with income above $94,700 ($149,550 for joint returns).

Coverdell Education Savings Accounts. Parents and others who want to save for a student’s education costs can contribute a maximum of $2,000 to these accounts (contributions are after-tax, like a Roth IRA), and then withdraw the contributions and investment earnings tax-free if the funds are used to pay qualified education expenses. The maximum contribution starts to phase out for taxpayers with modified adjusted gross income of $95,000 ($190,000 for married-filing-jointly filers), while taxpayers with income above $110,000 ($220,000 for joint filers) are prohibited from contributing to such accounts.

Retirement plan contribution limits

There were rumors that the tax reform law would lead to significant changes in retirement plan contribution limits, but those changes never came to pass. The total amount that employers and employees combined can contribute to a 401(k) or similar defined-contribution plan rises to $55,000 in 2018, up from $54,000 in 2017. The maximum annual employee contribution increases to $18,500, from $18,000 a year ago, while the catch-up contribution for people aged 50 and older remains $6,000. The limit on how much compensation can be counted under a qualified plan rose to $275,000, from $270,000. Meanwhile, the basic annual benefit limit for defined-benefit plans rose to $220,000, from $215,000.

Table 4: Retirement Plan Contribution Limits

  2018 2017
Annual compensation used to determine contribution for most plans $275,000 $270,000
Defined-contribution plans, basic limit $55,000 $54,000
Defined-benefit plans, basic limit $220,000 $215,000
401(k), 403(b), 457(b), Roth 401(k) plans, elective deferral limit $18,500 $18,000
Catch-up provision for individuals 50 and over, 401(k), 403(b), 457(b), Roth 401(k) plans $6,000 $6,000
SIMPLE plans, elective deferral limit $12,500 $12,500 $12,500
SIMPLE plans, catch-up contribution for individuals 50 and over $3,000 $3,000

Source: IRS

Individual retirement accounts

In 2018, taxpayers who save for retirement in a traditional IRA or Roth IRA are limited by the same contribution maximums as applied in 2016 and 2017: $5,500, plus a $1,000 catch-up for those 50 and older.

Deductible IRA. Taxpayers who aren’t participating in a retirement plan at work generally can fully deduct their contributions to a traditional IRA. However, income thresholds limit the deductibility of such contributions for taxpayers who are participating in a workplace plan (or if their spouse participates). The following table details the income thresholds, which are slightly higher in 2018, due to IRS inflation adjustments.

Table 5: MAGI Limits for IRA Deductibility in 2018 if Covered by a Qualified Plan at Work

Filing status Full deduction Partial deduction No deduction
Single, head of household Less than $63,000 $63,000–$73,000 More than $73,000
Married filing jointly Less than $101,000 $101,000–$121,000 More than $121,000
Married filing jointly—deduction if taxpayer not covered by qualified plan, but spouse is Less than $189,000 $189,000–$199,000 More than $199,000
Married filing separately N/A 0–$10,000 More than $10,000

Source: IRS

Roth IRA contributions. Income thresholds limit who can contribute to a Roth IRA (there are no such income limits on Roth conversions), and those limits increase slightly in 2018 for most taxpayers, except for couples who are married, filing separately.

Table 6: AGI Limits for Roth IRA Contributions in 2018

Filing status Full deduction Partial deduction No deduction
Single, head of household Less than $120,000 $120,000–$135,000 More than $135,000
Married filing jointly Less than $189,000 $189,000–$199,000 More than $199,000
Married filing separately N/A 0–$10,000 More than $10,000

Source: IRS

Health savings accounts

Health savings accounts offer the rare tax trifecta: Contributions are made pretax, enjoy tax-free investment returns, and money comes out tax-free if used for qualified medical expenses. The downside is that such accounts currently are available only to those who are enrolled in a high-deductible health plan, which can pose steep up-front costs for consumers. For 2018, the minimum annual deductible for a qualifying health plan is $1,350 for an individual plan and $2,700 for family coverage. The maximum deductible contribution to an HSA in 2018 is $3,450 for individuals. For family coverage, the maximum deductible contribution is $6,900.

Table 7: Health Savings Accounts 2018

  Contribution limit Minimum annual deductible Maximum out of pocket (deductibles and copays) 55+ catch-up contribution
Single $3,450 $1,350 $6,650 $1,000
Family $6,900 $2,700 $13,300 $1,000

Source: IRS Revenue Procedure 2017-37

Long-term-care premiums

Taxpayers who are paying for long-term care generally can deduct a portion of their premiums as a qualified medical expense. The deductible varies based on the taxpayer’s age. See the table below for the specific amounts, which increase slightly in 2018.

Table 8: Amount of LTC Premiums That Qualify as Medical Expenses

Age before close of tax year 2018 2017
40 or younger $420 $410
41 to 50 $780 $770
51 to 60 $1,560 $1,530
61 to 70 $4,160 $4,090
Over 70 $5,200 $5,110

Source: IRS Revenue Procedure 2017-58

Social Security

Social Security beneficiaries may be glad to learn they’re set to receive a 2% cost of living adjustment to their benefits—a bit better than the zero adjustment in 2016 and 0.3% in 2017. The estimated maximum monthly benefit is $2,788 in 2018, up from $2,687 in 2017. The maximum taxable wage base in 2018 is $128,400, up from $127,200 in 2017. The tax rate remains the same: 6.2% each for employer and employee (12.4% for self-employed people).

Tax on Social Security benefits. Sometimes retirees are surprised to find their Social Security benefits are taxed. Table 9 below shows the income thresholds at which benefits start to be taxed. To figure their bill, beneficiaries must compute their “provisional” income, which is also known as “combined” income. Combined income = income + nontaxable interest + one-half of Social Security benefits.

Table 9: Income Brackets for Tax on Social Security Benefits

Filing status Provisional income Amount of Social Security subject to tax
Married filing jointly Under $32,000
$32,000–$44,000
Over $44,000
0
Up to 50%
Up to 85%
Single, head of household, qualifying widow(er), married filing separately and living apart from spouse Under $25,000
$25,000–$34,000
Over $34,000
0
Up to 50%
Up to 85%
Married filing separately and living with spouse Over 0 Up to 85%

Source: Social Security Administration

Full retirement age. The so-called “full” or “normal” retirement age for claiming unreduced Social Security benefits is 66 for people who were born from 1943 through 1954. For those born after 1954 but before 1960, full retirement age is 66 plus some number of months, depending on the birth year. For those born in 1960 or later, full retirement age is 67.

The earliest anyone can claim benefits is age 62, though claiming before one’s full retirement age leads to a permanently reduced monthly benefit amount. On the other hand, delaying benefits past one’s full retirement age can lead to higher benefits—as much as 8% a year higher up to age 70. The decision of when to claim benefits is a complex one; the best answer will vary depending on an individual’s circumstances. Note that even if someone delays Social Security benefits, he or she should sign up for Medicare at age 65 to avoid a late-enrollment penalty.

Retirement earnings test. When Social Security beneficiaries earn money from working, they risk a temporary reduction in benefits if their earnings exceed a certain amount—this only applies to people who are younger than their full retirement age. For every $2 in earnings above an income threshold, $1 is withheld from their benefits. That earnings threshold is $17,040 in 2018, up from $16,920 in 2017. In the year that the beneficiary reaches full retirement age, $1 of benefits is withheld for every $3 of earnings above $45,360, up from $44,880. There is no reduction in benefits after full retirement age. Once the beneficiary reaches full retirement age the benefit is adjusted to remove the actuarial reduction for those months in which a benefit was withheld.

Medicare

The standard premium amount in 2018 is $134, though some Part B beneficiaries pay less (an average of $130 in 2018) due to the “hold harmless” provision that protects them if Social Security benefits rise slower than Medicare premiums. The people who pay the higher figure include those signing up for Medicare Part B for the first time, those who don’t receive Social Security benefits, those who don’t have their Part B benefits automatically deducted from their Social Security benefits, and others. Meanwhile, some higher-income beneficiaries will pay more than the $134 standard premium (see Table 10 below).

Table 10: 2018 Medicare Premiums and Deductibles

  2018 2017
Part B (outpatient services) premium $134 (Average of $130 if held harmless) $134 (Average of $109 if held harmless)
Part B deductible $183 $183
Part A (inpatient services) deductible for first 60 days of hospitalization $1,340 $1,316
Part A deductible for days 61-90 of hospitalization $335/day $329/day
Part A deductible for more than 90 days of hospitalization $670/day $658/day

Source: Centers for Medicare and Medicaid Services

Medicare premiums for high-income taxpayers. There are higher Part B premiums for wealthier taxpayers that vary based on income. See the table below.

Table 11: Medicare Premiums for High-Income Taxpayers

2016 MAGI single 2016 MAGI joint Part B premium Part D income-related adjustment
$85,000 or less $170,000 or less $134.00 (Average of $130.00 if held harmless) $0.00
$85,001–$107,000 $170,001–$214,000 $187.50 $13.00
$107,001–$133,500 $214,001–$267,000 $267.90 $33.60
$133,501–$160,000 $267,001–$320,000 $348.30 $54.20
More than $160,000 More than $320,000 $428.60 $74.80

Source: Centers for Medicare and Medicaid Services

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