How the new tax code affects you

If you’re like most Americans, you know the few key points about the new tax law that your favorite news show or website keeps highlighting. I wanted to create an easy way for you to review what has changed that might impact you, but there is so much that has changed that I don’t know if I can cover it all. I’ll keep it brief, and use a table of contents so you can jump to the areas that interest you most. At the end of this post you’ll find a table comparing the new tax code to the one it replaced.

Provisions Impacting Everyone

Sunset Provision
New Rates
Standard Deduction and Personal Exemptions

If you have Dependents

Child Tax Credit
529 Allowable Expenses
529 ABLE Rollovers
Dependent Tax Credit
Kiddie Tax

Estate and Trusts

Estate and Trust Tax Brackets
Estate and Gift Tax Exemption


Medical Expense Deduction
State and Local Taxes
Mortgage Interest Deduction
Charitable Contribution Deduction
Casualty Loss Deduction
Miscellaneous Itemized Deductions

Other Items

Alternative Minimum Tax
Capital Gains and Qualified Dividends
Qualified Business Income for Pass-Through Entities

Existing Deductions and Credits that were left Unchanged
Previous Tax Law that was Revoked  
Then and Now (2017 Tax Law Compared to 2018)
Sunset Provision

First off, which laws are permanent and which laws will sunset in 2025?

Basically all of the changes to the corporate tax code, and the removal of the individual mandate to have health insurance or pay a penalty tax are permanent. How tax brackets are indexed is also permanent, but it's a bit technical, so I won’t go into it here. If you’re interested, feel free to look up the difference between CPI and chained CPI. All of the changes to the individual tax code that I mention below will sunset in 2025.

New Rates

While the number of tiers in the marginal tax bracket system have remained the same, the rates for many of the brackets decreased slightly. Here are the 2018 tax brackets. At the end of the post there’s a comparison of these with the 2017 tax brackets.

2018 Tax Brackets

Up to $9,525 10%
$9,525 - $38,700 12%
$38,700 - $82,500 22%
$82,500 - $157,500 24%
$157,500 - $200,000 32%
$200,000 - $500,000 35%
Over $500,000 37%
Married Filing Joint
Up to $19,050 10%
$19,050 - $77,400 12%
$77,400 - $165,000 22%
$165,000 - $315,000 24%
$315,000 - $400,000 32%
$400,000 - $600,000 35%
Over $600,000 37%
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Standard Deduction and Personal Exemptions

The biggest change for most people will be the change to the deductions. The standard deduction was increased while the personal exemption was repealed. The new standard deduction is $12,000 for individuals and $24,000 for married filing joint.

Child Tax Credit

The Child Tax Credit has been increased to $2,000 of which $1,400 will be refundable if the credit reduces your tax liability to $0. Also, the Child Tax Credit phaseout limits were increased to $200,000 for individuals and $400,000 for married filing joint (these thresholds are NOT indexed for inflation, which means the number can only be adjusted by an act of Congress).

529 Allowable Expenses

529 funds can now be used tax-free to pay for primary and secondary school expenses (or elementary through high school if you prefer that nomenclature). Up to $10,000 per student per year can be used to help pay for public, private, or religious schools.

529 ABLE Rollovers

529s can now be rolled over to 529 ABLE accounts (for students with disabilities) if the beneficiary does not change. This is limited to the annual contribution limit, along with contributions from all sources. So if a student becomes disabled after building up a good sized 529 the account can slowly be changed over to an ABLE account.

Dependent Tax Credit

For dependents that don’t qualify for the Child Tax Credit, there is a new $500 nonrefundable credit. This may include children 17 or older, or even parents that you are taking care of in your home. This credit phases out for individuals at $200,000 and at $400,000 for married filing joint (these thresholds are NOT indexed for inflation).

Kiddie Tax

Unearned income for children under 19 or full-time students under 24, is taxable the same as trust income. All unearned income over $12,500 is taxed at 37%.

Estates, Trusts, and Kiddie Tax
Up to $2,550 10%
$2,550 - $9,150 24%
$9,150 - $12,500 35%
Over $12,500 37%
Estate and Trust Tax Brackets

There are now only 4 brackets for trusts and estates.

Estate and Gift Tax Exemption

Estate and Gift Tax will now not be due on estates/gifts of less than $11,200,000 for individuals, $22,400,000 for married couples using the portability rules (or an A/B Trust).

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Medical Expense Deduction

For 2017 and 2018 the threshold to deduct medical expenses is lowered to 7.5%. Starting in 2019 the threshold is increased back to 10%.

State and Local Taxes

Income, Sales, and Property Taxes from State and Local governments will still be an itemized deduction, however, with a $10,000 cap of these taxes combined. The $10,000 cap applies to both individual filers as well as married filing joint.

Mortgage Interest Deduction

Mortgage interest on first or second homes on loans up to $750,000 will be deductible. Existing mortgages that were deductible, but are over this limit are grandfathered into deductibility. Additionally Home Equity loan interest is no longer deductible.

Charitable Contribution Deduction

Deductions on cash gifts to charities are now limited to 60% of the taxpayer's AGI. Substantial documentation is still required to claim this deduction.

Casualty Loss Deduction

Personal casualty losses are now only deductible if they are attributable to a declared national disaster.

Miscellaneous Itemized Deductions

Items that could be claimed under the Miscellaneous Itemized Deductions subject to a 2% of AGI floor are no longer deductible. Specifically you can no longer claim unreimbursed employee expenses if you are a W-2 employee (home office expenses, travel for work, etc.), tax preparation fees, or investment fees.

Alternative Minimum Tax

The AMT Exemption was increased to $70,300 for individuals and $109,400 for married filing joint. The phaseout for AMT Exemption was increased to $500,000 for individuals and $1,000,000 for married filing joint.

Capital Gains and Qualified Dividends

No changes were made to capital gains and qualified dividend tax rates or marginal brackets. This means that while the tax brackets capital gains used to be tied to increased, the capital gains brackets did not. Additionally the 3.8% “Medicare Surtax” on investment income is unchanged.

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Qualified Business Income Deduction for Pass-Through Entities

Okay, everything so far has been fairly simple, at least compared to this piece. If you own your own business read this carefully and then dig in and do your own research until you figure out how this works. This is only the highlights and doesn’t go into all the details (like the alternative wage limit) If you don’t have your own business, feel free to skip this section.

Certain Partnerships, LLCs, S Corporations, and Sole Proprietorships that file Schedule C (pass-through entities) will have a deduction of 20% of their Qualified Business Income (QBI) (or 50% of payroll, whichever is lower) effectively causing the business to only pay tax on 80% of their pass-through income. This deduction will be on the personal 1040 below the line (it won’t lower your AGI), but is not an itemized deduction (so you can still claim the new higher standard deduction in addition to this).

QBI is NOT - investment income, income from a foreign business activity, reasonable compensation for an S Corp owner-employee, or any guarantee payment for services in a partnership or LLC.

QBI IS - net profit “connected with conduct of a trade or business within the United States….included or allowed in determining taxable income for the taxable year.” Note that this is based on the company, not your income.

If your taxable income (after deductions) is above $157,500 ($315,000 for married filing joint), AND you do business in “specified services” your exclusion will be reduced or phased out. These “specified services” include: health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, or any other trade or business where the primary asset of the business is the reputation or skill of one or more of its employees. Engineers and architects are specifically excluded from this exclusion list (so they still get the QBI deduction).

If your taxable income (after deductions) is above $157,500 ($315,000 for married filing joint), and you are not affected by the above phaseout, you will have a limitation on the amount of the deduction based on the W-2 wages paid by the business.

Existing Deductions and Credits that were left Unchanged
  • Elderly and Dependent Care Credit
  • Tax Credit for Electric Vehicles
  • $250 School Teacher Deduction
  • Adoption Assistance Tax Credit
  • Tax Preferences for Private Activity Bonds
  • Capital Gains exclusion of $250,000/$500,000 of primary residence
Previous Tax Laws that were Revoked
  • Individual Mandate - starting in 2019 there is no tax penalty for failing to own health insurance
  • Alimony - For divorce decrees after December 31, 2018 alimony payments are no longer deductible, and the recipient no longer reports alimony as taxable income.
  • 1031 Exchanges - Beginning 1/1/2018 1031 exchanges can ONLY be done on real estate NOT investment property.
  • Moving expenses - Moving expenses are no longer deductible, regardless of the distance moved to take on a new job. This also means that reimbursed moving expenses will now be taxable income to the employee.
  • Business Entertainment Expenses - M&E (meals and entertainment) are common expenses for businesses, as of now only M is deductible (still limited to 50%).
  • Deferred Compensation - more deferred compensation will be taxed when it is vested regardless of when it is paid.
  • Sexual Harassment Settlements - previously a company could deduct a settlement and related attorney fees made for sexual harassment lawsuits, under the new law they still can, as long as they don’t require a non-disclosure agreement as part of the settlement.
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Then and Now
2017 and after 2025
2018 - 2025
529s Can pay for college   Can also pay for primary and secondary education
  Cannot roll over to ABLE   CAN roll over to ABLE
Deferred Compensation Taxable when paid   Taxable when vested
Alimony Deduction for paying   No deduction when paying
  Taxable Income when received   Not taxable income when received
Qualified Private Activity Bonds Tax-Free, subject to AMT   No change
1031 Exchanges Includes boats, airplanes, etc.   Only allowed for real estate
Business Entertainment 50% deductible   Not deductible
Sexual Harassment Settlements Deductible to company   Not deductible if an NDA is required
Primary Residence $250,000/$500,000 Cap Gain Exclusion   No change
Above the Line Deductions
School Teacher Deduction $250   No change
Moving Expenses Deductible w/ requirements   Not deductible
Moving Bonus Non-taxable income   Taxable income
Below the Line Deductions
Standard Deduction $6,750/$12,700   $12,000/$24,000
Personal Exemption $4,050   Revoked
Pass-through income No deduction   20% QBI Deduction (with limitations)
Itemized Deductions
Medical Expenses 10% floor for deductions   7.5% floor for deductions (until 2019)
State and Local Taxes Uncapped Deduction   Combined $10,000 Limit
Mortgage Interest Cap of $1,000,000 Principal   Cap of $750,000 Principal
  HELOC interest deductible   HELOC interest NOT deductible
Charitable Contributions 50% of cash gifts deductible   60% of cash gifts deductible
Casualty Loss Financial loss deductible   Federally declared disaster required
Unreimbursed Business Expenses Deductible subject to 2% floor   No longer deductible
Tax Preparation Fees Deductible subject to 2% floor   No longer deductible
Investment Expenses Deductible subject to 2% floor   No longer deductible
Child Tax Credit $1,000 (Fully Refundable)   $2,000 ($1,400 Refundable)
Dependent Tax Credit N/A   $500
Elderly/Dependent Care Credit Up to $1,050   No change
Electric Vehicle Credit Up to $7,500   No change
Adoption Assistance Credit $13,570   No change
Other Taxes
AMT Exemption $54,300 / $84,500   $70,300 / $109,400
AMT Exemption Phaseout $120,700 / $160,900   $500,000 / $1,000,000
Individual Mandate Penalty Up to $2,085   Revoked after 2018
Tax Rates
Kiddie Tax Income before Max Rate $2,100   $12,500
Kiddie Tax Rate Parent’s Top Marginal Rate   Up to 37% (based on Trust Tax Brackets)
Tax Brackets
  Individual   Individual
  Up to $9,325 10%   Up to $9,525 10%
  $9,325 - $37,950 15%   $9,525 - $38,700 12%
  $37,950 - $91,900 25%   $38,700 - $82,500 22%
  $91,900 - $191,650 28%   $82,500 - $157,500 24%
  $191,6500 - $416,700 33%   $157,500 - $200,000 32%
  $416,700 - $418,400 35%   $200,000 - $500,000 35%
  Over $418,400 39.6%   Over $500,000 37%
  Married Filing Joint   Married Filing Joint
  Up to $18,650 10%   Up to $19,050 10%
  $18,650 - $75,900 15%   $19,050 - $77,400 12%
  $75,900 - $153,100 25%   $77,400 - $165,000 22%
  $153,100 - $233,350 28%   $165,000 - $315,000 24%
  $233,350 - $416,700 33%   $315,000 - $400,000 32%
  $416,700 - $470,700 35%   $400,000 - $600,000 35%
  Over $470,700 39.6%   Over $600,000 37%
  Estates and Trusts   Estates, Trusts, and Kiddie Tax
  Up to $2,550 15%   Up to $2,550 10%
  $2,550 - $6,000 25%   $2,550 - $9,150 24%
  $6,000 - $9,150 28%   $9,150 - $12,500 35%
  $9,150 - $12,500 33%   Over $12,500 37%
  Over $12,500 39.6%      
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