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Tax Cuts And Jobs Act

Last Update Date : April 30, 2019
Estimated Read Time: 4 min

The new Tax Cuts and Jobs Act, passed in December 2017, provides for reconciliation under the titles II and V of the concurrent resolution on the budget for the fiscal year 2018. The act introduced by Congress has amended the Internal Revenue Code of 1986. Some of the major changes made by the Act are – reduction of tax rates for individual tax returns, increase in Standard Deduction and Family Tax Credits, Elimination of Personal Exemptions, less beneficial itemized deductions, limited deductions for SALT and property taxes.

Tax Cuts and Jobs Act for Individuals

The TCJA reform has made several significant changes to the Individual Income Tax which includes reforms to the standard deduction and itemized deduction, AMT, Child Tax Credit and the lower marginal tax rates across brackets. These changes will be valid till 31st Dec 2025, after which the changes will maybe revert to the pre-TCJA status.

Major Changes

Standard Deduction

The TCJA has doubled the Standard Deduction amounts up to $12,000 for single filers, $18,000 for the head of household and $24,000 for joint filing return status. The amounts will be adjusted according to the inflation in 2019. The increased amounts of Standard Deduction can compensate for the elimination of the exemptions.

Itemized Deduction

The TCJA has either limited or reduced the scope of itemized deductions. You can avail of the itemized deductions if the total itemized deductions exceed the total of the standard deduction. Some of the changes made to itemized deductions for 2018-2025 are:

State and Local Tax Deduction

The Taxpayers can claim a deduction of a maximum of $10,000 on an aggregate of state and local property taxes and either on income or sales tax.

Mortgage Interest Deduction

The TCJA has limited the deduction for mortgage interests. The Taxpayer can deduct interest only on mortgage debt amounting up to $750,000.

Home Equity Interest Deduction

Interest on home equity interest deduction has been suspended by the new TCJA for the period 2018-2025. However, there are some exceptions, and it is still being interpreted.

Medical Expense Deduction

Qualified medical expenses are deductible only if the amount exceeds the applicable AGI threshold.
As per the new law, the medical expense deduction has been reduced from 10% of AGI to 7.5% for all taxpayer.

Charitable Contributions

The charitable contributions for cash donations made to public charities, the deduction limit has been raised to 60% of AGI up from 50% in the previous tax year.

Family Tax Credits

Unlike Deductions, Tax credits help in reducing the Tax bill. The TCJA has doubled the Child Tax Credit up to $2000 per qualifying child under the age of 17. The Credit is refundable up to $1400 per child. The phase-out begins when the AGI exceeds $200,000 for single and other filers and $400,000 for married jointly filers. It also includes a credit of $500 for other qualifying dependents which is non-refundable.

Alternative Minimum Tax (AMT)

AMT is for specific taxpayers who have certain types of income that receive favorable treatment or who qualify for certain deductions, under the U.S. Tax law. These Tax benefits can help reduce the regular tax of some Taxpayers with higher income levels. The TCJA has increased the AMT exemption amount based on the below table.

MFJ & QUALIFIED WIDOWER$109,400$84,500

“Kiddie” Tax

The “Kiddie Tax” is a type of tax that is levied on the portion of the child’s unearned income that exceeds $2,100. The New TCJA 2018 taxes a child’s unearned income according to the tax brackets used for trusts and estates. They are taxed at the highest marginal rate of 37% for 2018, once the income reaches up to $12,500.

Other Important Changes

Roth Conversions

The TCJA reform prohibits the taxpayers to convert a pre-tax traditional IRA into post-tax Roth IRA from recharacterizing. (i.e. it can’t be reversed).

529 Savings Plans

This is a plan operated by a state or educational institution to provide tax advantages and potential other incentives to make it easier to save for college and other post-secondary training, or for tuition in connection with enrolment or attendance at an elementary or secondary public, private or religious school for a designated beneficiary, such as a child or a grandchild. After the reform, it includes not just postsecondary school expenses but also primary and secondary school expenses.

Individual Mandate

The TCJA reform has eliminated the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty, effective for months beginning after December 31, 2018.

People Also Ask

Q. Did the Tax Cuts and Jobs Act replace the U.S. Tax System?

A. No, The TCJA did not replace the US tax law; however, it certainly did bring about certain changes to US tax law.

Q. Are the Tax Cuts permanent?

A. No, the new reforms are not permanent, it is valid until 31st DEC 2025.

Q. What happened to personal and dependent exemptions?

A. The personal and dependent exemptions are suspended for the time being, and the standard deduction limit has been increased.

Q. Did the tax rates for individual tax return filing change, after the reform?

A. Yes, the new reform has brought about multiple changes in tax rates and has led to the reduction in tax brackets.

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Anshu Jain
Anshu Jain is the Manager, Offshore Operations at H&R Block (India). She holds an MBA in Finance and has an experience of over ten years in business operations, U.S. tax advisory and program management. When she is not working, Anshu enjoys reading and writing about U.S. taxation.

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