The Tax Cuts and Jobs Act (TCJA), enacted in late 2017, produced the most sweeping tax law change in more than 30 years. The TCJA, often referred to as tax reform, affects nearly every taxpayer — and the 2018 federal return they’ll file in 2019.
For taxpayers preparing to file their 2018 tax return or getting ready to meet with their tax professional, understanding the changes from the Tax Cuts and Jobs Act can help them “Be Tax Ready.” More information is available in IRS Publication 5307, Tax Reform Basics for Individuals and Families.
Federal income tax withholding changes
The Tax Cuts and Jobs Act changed the way taxable income is calculated and reduced the tax rates on that income. The IRS issued new 2018 withholding tables last year to reflect these changes. Since taxpayers need to pay most of their tax during the year, as income is earned or received, the tables show payroll service providers and employers how much tax to withhold from employee paychecks.
Most taxpayers probably started seeing withholding changes in their paychecks early in 2018. IRS encouraged taxpayers throughout 2018 to use the IRS Withholding Calculator to perform a Paycheck Checkup and adjust their tax withholding by filing Form W-4, Employee’s Withholding Allowance Certificate, with their employer if too much or too little tax was being withheld for the year. Taxpayers can also make estimated or additional tax payments to avoid an unexpected tax bill and possibly a penalty.
Taxpayers who pay too much tax during the year will claim a credit or refund for the overpayment while those who have too little tax, either through withholding or paid through estimated payments, may owe tax.
Taxpayers should review their tax withholding in 2019 and make any adjustments with their employer as early in the year as possible. This can help protect against having too little tax withheld and facing a lower refund or unexpected tax bill and even a penalty next year.
In addition to lowering the tax rates, other changes in the law that affect taxpayers and their families include suspending personal exemptions, increasing the standard deduction, increasing the child tax credit, and limiting or discontinuing certain deductions.
Deduction for personal exemptions suspended
For 2018, taxpayers can’t claim a personal exemption deduction for themselves, their spouse or dependents. This means that taxpayers will not be able to reduce income subject to tax by an exemption amount for each person included on their tax return as they have in previous years. However, changes to the standard deduction amount and child tax credit may offset at least part of this change for most families and, in some cases, may result in a larger refund.
Standard deduction nearly doubled
The standard deduction is a dollar amount that reduces the income on which a taxpayer is taxed. It varies by filing status. The Tax Cuts and Jobs Act nearly doubled standard deductions.
| Filing Status | Standard Deduction Starting in 2018 | Increased from 2017 |
|---|---|---|
| Single | $12,000 | Up from $6,350 in 2017 |
| Married filing jointly. Qualifying widow(er). | $24,000 | Up from $12,7000 in 2017 |
| Married filing separately | $12,000 | Up from $6,350 in 2017 |
| Head of Household | $18,000 | Up from $9,350 in 2017 |
The amounts are higher for taxpayers who are blind or at least age 65.
More than nine out of 10 taxpayers use tax software or a paid preparer to file their taxes. Generally, taxpayers answer a series of questions in an interview format and the software or preparer chooses the best option (standard deduction or itemized deductions) for them. The new tax law hasn’t changed this process and the IRS has worked extensively with software developers and tax preparers to ensure that they are prepared to help.
Itemized deductions modified or discontinued
Almost everyone who usually itemizes deductions filing Schedule A, Itemized Deductions, is affected by changes from the Tax Cuts and Jobs Act. Many individuals who itemized last year may now find it more beneficial to take the now higher standard deduction – and may have a simpler time filing their taxes.
Deduction for state and local income, sales and property taxes modified. A taxpayer’s deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately). Anything above this amount is not deductible.
Deduction for home equity interest modified. Interest paid on most home equity loans is not deductible unless the interest is paid on loan proceeds used to buy, build or substantially improve a main home or second home. For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.
Deduction for casualty and theft losses modified. A taxpayer’s net personal casualty and theft losses must now be attributable to a federally declared disaster to be deductible.
Miscellaneous itemized deductions suspended. Previously, when a taxpayer itemized, they could deduct the amount of their miscellaneous itemized deductions that exceeded 2 percent of their adjusted gross income. These expenses are no longer deductible. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. It also includes deductions for tax preparation fees and investment expenses.