- How the Tax Cuts and Jobs Act Legally Affects Individual Taxpayers
- Marriage Penalties Under the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act was a federal law that went into effect in 2018, resulting in sweeping changes for the tax obligations of many U.S. taxpayers. Perhaps the most notable change in the law was the reduction in income tax rates for people in many tax brackets. The law created a new 12 percent tax bracket to ease the burden on middle-income taxpayers, and it reduced the tax rate for the highest tax bracket from 39.6 percent to 37 percent.
The Standard DeductionThe TCJA made taking the standard deduction, rather than itemized deductions, preferable for more filers.
The other major change brought by the Tax Cuts and Jobs Act involved the standard deduction. This is a fixed amount that any individual taxpayer can apply to their total taxable income. The law doubled this amount, while eliminating the personal exemption and many itemized deductions. As a result, many more individual taxpayers will start using the standard deduction rather than itemizing their deductions. Some of the itemized deductions that were eliminated included alimony payments, investment expenses, moving costs for moving to a new job, unreimbursed employee expenses, and tax preparation costs. Other deductions remained in effect but in a more limited form, such as the casualty loss deduction and the state and local tax deduction, which was capped at $10,000 per year. Meanwhile, the deduction for charitable cash contributions increased.
The threshold for the medical expenses deduction shrank from 10 percent to 7.5 percent of a taxpayer’s adjusted gross income. This was initially scheduled to return to 10 percent in 2020, but Congress kept it at the lower amount. The Tax Cuts and Jobs Act also wiped out the tax penalty associated with the individual mandate of the Affordable Care Act, often known as Obamacare. In other words, complying with the Affordable Care Act became voluntary for individuals starting in 2019.
The Tax Cuts and Jobs Act doubled the child tax credit to $2,000 per child. It also raised the income ceiling at which taxpayers lose eligibility for the credit. The law added a family care credit in a lump sum of $500, which you can even claim if you have dependents who are not qualifying children. Meanwhile, as mentioned above, alimony is no longer deductible, but it is tax-free for the ex-spouse who receives it.
One of the most popular deductions for people who itemize is the home mortgage interest deduction. The Tax Cuts and Jobs Act limits it to interest on $750,000 of home acquisition debt. Previously, it applied to interest on up to $1 million of home acquisition debt. The new limit applies only to homes purchased after December 15, 2017, though. Taxpayers also can no longer deduct interest on home equity loans unless they were taken out to purchase, build, or improve their primary or secondary residence.
The Tax Cuts and Jobs Act doubled the exemption from the federal estate tax, which continues to steadily increase. It also increased the exemption from the Alternative Minimum Tax so that it covers fewer taxpayers. The income threshold for applying the AMT rose by nearly 40 percent.
Last reviewed October 2023
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