The Tax Cut and Jobs Act was signed into law just before the Christmas holiday, and it is the most significant tax reform package in a generation.
Tax reform affects nearly every part of our country’s financial system, and it will impact your personal returns, too, but not all at once.
While you’ll see some provisions of tax reform (such as lower withholdings) take effect in your 2017 tax returns (the tax deadline is Tuesday, April 17, 2018), note that other elements won't roll out until 2019 and beyond.
Here, we’ve gathered our top four ways tax reform may put extra money in your pocket. These changes go into effect in this year, which means you won’t see their impact until your file your 2018 tax returns next year.
1. Your tax rate will likely be lower
The new law lowers marginal tax rates, so people will pay less at nearly every income level. To find out how your tax rate will change, check the tables below.
2. You get a bigger standard deduction
Tax reform nearly doubles the standard deduction, taking it from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for joint filers.
The catch? It also eliminates the personal exemption, which, in 2017, was $4,050 per person or $8,100 for a married couple. (If you had kids, you’d get an additional personal exemption for each child as well; that’s gone under the new rules.)
Still, for a single filer, the new standard deduction is $1,000 larger than the old standard deduction plus personal exemption combined, and for married couples filing jointly, it exceeds the old total by $2,900.
The larger standard deduction means that fewer people will itemize, particularly since deductions for state and local taxes are capped at $10,000 and mortgage interest can be deducted only on properties valued at $750,000 or less. However, if you don’t itemize, you’ll likely come out ahead under the new rules.
3. Have kids? You’ll get a better break
The new tax bill doubles the child tax credit from $1,000 to $2,000 per qualifying child. This is a credit, not a deduction, so you can subtract your child tax credit from the amount of taxes you owe.
If your credit is more than your tax bill, you can even get money back from the government; up to $1,400 of the child tax credit is refundable.
The tax credit has also been expanded for higher income families. It now begins phasing out at a hefty $200,000 for individual filers, and $400,000 for married filing jointly households.
4. A special deduction if you’re self-employed
If you receive all or part of your income from an unincorporated business, such as from a sole proprietorship, partnership or S corporation, then you may be eligible for a special 20% pass-through deduction on your self-employment income.
The pass-through deduction applies to anyone who makes less than $157,000 from an unincorporated business (or $315,000 for married filing jointly). It phases out above that and is only available to certain kinds of companies.
The deduction reduces your federal income tax, but doesn’t affect your adjusted gross income, so it has no effect on state and local income taxes or your eligibility for means-tested benefits (such as ACA subsidies) or tax credits (like the child tax credit).
Not everyone will benefit
Tax reform won’t reduce everyone’s taxes.
In fact, if you have always claimed large itemized deductions for state and local taxes and mortgage interest, then your bill may go up.
People with roughly the same amount of income will also face very different tax liabilities, depending on where they live, how they earn their money, and other individual characteristics.
But for most people tax reform will be a win, saving you money in 2018 and beyond.