The Tax Cuts and Jobs Act law will take effect beginning with the 2018 tax year. This tax overhaul lets some individuals take home more in 2018 when filing their taxes. In some cases though, cuts to deductions and caps on itemized deductions will reduce tax returns. Understanding how this law will affect filing in 2018 can help you maximize deductions and ensure you have ready the necessary information.

The Tax Brackets Have Changed

For 2018, the seven tax brackets are: 10%, 12%, 22%, 24%, 32%, 35%, 37%. Maximum income thresholds have also changed for individuals and joint filers. As a result, employees may notice increases in take-home pay. People of all salary levels will pay less income tax in 2018. However, individuals who fall near the middle of the tax charts will see the biggest breaks.

2018 income tax changes

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Some Previous Deductions Were Eliminated

  • The Personal Exemption Deduction was eliminated. Deductions for individuals, spouses, and dependents will no longer be possible. The exemption for 2017 for individuals was $4,050. Families with multiple children will be most affected by this loss; the deduction has been in place for many years.
  • The new plan also eliminates the Moving Expenses Deduction. For tax years beginning after December 31, 2017, most individuals will not be allowed to claim a deduction for moving expenses. However, this deduction is still available for reassigned members of the armed forces.

2018 tax changes

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Standard Deductions are Higher in 2018

The standard deduction amount for all individuals will be higher than it was in 2017. When compared with the previous year's deductions, amounts have nearly doubled. This increase will most greatly benefit couples filing jointly and individual filers. Married couples will receive a $24,000 deduction, and single filers can claim a $12,000 deduction.

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New Caps on Itemized Deductions

  • State and local taxes can still be itemized for deduction. However, the potential deduction amount cannot exceed $10,000.
  • Interest on mortgages for primary and secondary residences is still deductible. However, the total loan must not exceed $750,000. Otherwise, the filer cannot apply the deduction.
  • Medical expenses are deductible if they are greater than 7.5% of someone's income. This is the same as the available deduction for 2017. In years previous to 2017, the potential deduction was only available if medical care expenses were more than 10% of an individual's income.

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Estate Inheritance Taxes and Retirement Allowances for 2018

The estate exemption for 2018 is $11.2 million per individual filer and $22.4 million per couple filing jointly. This threshold is higher than it was in 2017. Individuals contributing to retirement plans including employee 401(k), 403(b) and the majority of 457 plans, as well as the Thrift Savings Plan, can now contribute more. In 2018, you can claim $500 more than 2017, for a total of $18,500.

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The Maximum Child Tax Credit Has Increased

People with dependent children can receive a credit up to $2,000 per qualifying child in 2018. This amount is double the allowance available in 2017. To qualify, the child must be 17 or younger. For families and single parents, the increase in the Child Tax Credit can help offset the elimination of the Personal Exemption Deduction.

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Employees May Need to Fill Out New Paperwork

Employees who receive W-2 tax forms annually from their employer may need to request, review, and complete new W-4 forms. Changes to 2018 income tax will likely change how many exemptions they can claim. Proactively making any necessary adjustments to exemptions can help prevent owing taxes after filing in 2018.

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HSAs Can Hold More Funds in 2018

Individuals can contribute more to a health savings account in 2018. The maximum amounts are now $3,450 maximum for those filing individually and $6,850 for couples filing jointly and families. These increased allowances will benefit individuals most since they see the largest increase. Married couples and people with dependents can only contribute $50 more annually than they were able to put aside in 2017, so this won't have a huge effect come tax season. People age 55 or older are eligible to contribute an additional $1,000 to their HSA.

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Some Tax Law Changes are Temporary

According to the U.S. Congress’s Committee on Ways and Means, the tax overhaul had specific goals, including simplifying the tax process, providing more support to American families, and improving options for saving for education. However, 23 of the Tax Cuts and Jobs Act provisions are not permanent and will expire in 2025. The increase in the child tax credit and standard deduction amounts will both rollback at this time.

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New Tax Laws Also May Affect Business Owners

A new 21% tax rate for pass-through businesses including S Corporations, partnerships, and sole proprietorships goes into effect in 2018. Not everyone will qualify, though. For those who do, the deduction may only apply to a small portion of their total income. This tax break is also set to expire at the close of 2025.

2018 income tax changes business owners

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