Key Changes Due to the Tax Cuts and Jobs Act
Personal and dependent exemptions are eliminated
In the past, taxpayers could claim a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative. Each exemption reduced taxable income by $4,050 in 2017. Under the Tax Cuts and Jobs Act (TCJA), personal and dependent exemptions are eliminated from 2018 through 2025.
In 2026, taxpayers can claim personal and dependent exemptions again.
Child tax credit increased through 2025
Through 2025, the TCJA increases the maximum child tax credit from $1,000 to $2,000 per qualifying child. The refundable portion of the credit increases from $1,000 to $1,400. That means taxpayers who don’t owe tax can still claim a credit of up to $1,400. The higher child tax credit will be available for qualifying children under age 17, as under current law.
The child tax credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) of over $200,000 or $400,000 (MFJ). This new phaseout more than doubles the phaseout range under current law.
In 2026, the child tax credit will change to the rules used in 2017, with a maximum credit of $1,000 per qualifying child, and lower phaseouts.
New credit for non-child dependents available through 2025
The TCJA allows a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit. Taxpayers can claim this credit for children who are too old for the child tax credit, as well as for non-child dependents.
In 2026, the credit for non-child dependents will no longer be available.
Standard deduction increases through 2025
The standard deduction will increase. In 2018, the standard deduction amounts will be:
- $12,000 (single)
- $18,000 (head of household)
- $24,000 (married filing jointly)
Due to the increase in the standard deduction, and because of changes to the rules for itemized deductions, many taxpayers who previously itemized will now claim the standard deduction instead.
Many itemized deductions eliminated, limited or modified
The TCJA has a large impact on itemized deductions, as several itemized deductions have been eliminated or modified.
- Miscellaneous itemized deductions subject to the 2-percent floor such as: Employee business expenses, Tax preparation fees, and Investment interest expenses
- Personal casualty and theft losses (except for losses in federally declared disaster areas)
- State and local income taxes (SALT), state and local sales tax, and property taxes may be deducted but only up to a combined total limit of $10,000 ($5,000 if MFS)
- Home mortgage interest has several modifications: Interest on a home equity loan is no longer deductible, Interest on a new home mortgage is limited to interest paid on a maximum of $750,000 ($375,000 if MFS) of a new mortgage taken out after December 14, 2017, and Taxpayers with a mortgage taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward; the $1 million ($500,000 if MFS) limit continues to apply to a refinanced mortgage incurred before December 15, 2017.
- Charitable contributions: The deduction for charitable contributions is expanded so that taxpayers may contribute up to 60% of their adjusted gross income, rather than up to 50%.
- Gambling losses remain deductible, but only to the extent of gambling winnings. The definition of losses from wagering transactions is modified.
- Medical expenses remain deductible. For 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of AGI. In 2019, the threshold will increase to 10% of AGI.
The overall limit on itemized deductions (often called the Pease limit) is also eliminated..
Most of the changes to itemized deductions will remain in place through 2025. In 2026, itemized deductions will generally follow the rules in place before the TCJA.
Many “Above-the-line” deductions eliminated, limited or modified
As with itemized deductions, many “above-the-line” adjustments have also been eliminated or limited:
- Alimony deduction for payments made under orders executed after December 31, 2018. For new orders, the TCJA no longer allows payors to deduct alimony payments or require the recipient to report income for alimony received. (Payments under existing orders are grandfathered and may continue to be deducted by the payor and should be reported as income by the recipient.)
- Tuition and fees deduction expired under previous law and was not renewed by the TCJA.
- Domestic production activities deduction (DPAD)
- Moving expenses are disallowed except for the expenses of active members of the military who relocate pursuant to military orders.
Stays the same
- Educator expense deduction. K-12 educators can deduct up to $250 per year for unreimbursed classroom supplies.
- Student loan interest of up to $2,500 can be deducted by qualifying taxpayers for interest paid on student loans.
- Health savings account (HSA) deduction
- IRA deduction
- Deductions for self-employed taxpayers such as SE tax, SE health insurance, and SE qualified retirement plan contributions.
Some education benefits remain the same, others modified
Taxpayers can continue to claim the American Opportunity Credit, a credit of up to $2,500 per year for the first four years of college education, and the lifetime learning credit, a credit of up to $2,000 per year for qualifying education expenses.
Taxpayers can continue to use savings bonds for education, educational assistance programs provided by employers, 529 plans and Coverdell education savings plans to save for college. Some scholarships and tuition waivers can continue to be treated as tax-free if certain conditions are met.
Taxpayers whose student loans are cancelled because death or total and permanent disability may be eligible to treat the cancellation of debt as tax-free.
Health care penalty eliminated
The penalty for failure to obtain health insurance coverage (the “individual mandate”) will be eliminated beginning in 2019. Taxpayers who did not have coverage in 2017 or 2018 will continue to owe a penalty for those years, unless they qualify for an exemption.
Self-employed taxpayers may claim a new deduction for qualified business income
Self-employed taxpayers can deduct up to 20% of qualified business income from a sole proprietorship, partnership, or S corporation. There are a few very important limitations placed on the deductions that we will go into in another post as this new code section is one of the more complicated aspects of TCJA.