The Reconciliation Act of 2017 (formerly known as the "Tax Cuts and Jobs Act") lowers most tax rates, but also denies or limits certain deductions, so whether any particular individual will see their federal income tax increase or decrease in 2018 depends on their level of income and what deductions will be claimed.
The most significant change in tax rates is the reduction in the top income tax rate from 39.6% to 37%, which means that taxpayers in the top income tax bracket will generally pay less tax.
The lowest income tax rate remains unchanged at 10%, but the intermediate rates have changed from 15%, 25%, 28%, 33%, and 35%, to 12%, 22%, 24%, 32%, and 35%. Because of changes in both rates and brackets, it's difficult to predict how much the tax has been reduced at any particular level of taxable income, but there is some decrease (or no increase) at every level of taxable income, with two exceptions:
Taxpayers who do not itemize deductions and have no dependents will generally be better off, even though personal exemptions have been eliminated, because the standard deduction has been increased. So, for example, under the old law a married couple with no dependents would have been entitled to a standard deduction of $13,800, and two exemptions of $4,450 each, for a total of $22,700 in reductions to taxable income. Under the new law, there will be no personal exemptions, but a standard deduction of $24,000.
For taxpayers with minor dependent child, the elimination of the deduction for personal exemptions may be offset by the increase in the child tax credit for dependent children under the age of 17, which has been doubled, from $1,000 to $2,000, and for which the threshold amounts at which the credit begins to be phased out has been increased from $110,000 to $400,000 for married taxpayers filing jointly, and to $200,000 for other taxpayers. (The threshold amounts had been $75,000 for unmarried taxpayers and $55,000 for married filing separately.) An additional credit of $500 is also allowed for dependents other than minor children.
Taxpayers who normally itemize deductions may see the benefit of lower tax rates entirely neutralized, or perhaps overwhelmed, by limitations on itemized deductions, such as the new limitation on deductions for state and local taxes.
The changes in deductions for the year 2018 can be summarized as follows:
| Type of Deduction | Prior Law | New Law |
|---|---|---|
| Standard Deduction | $13,000 for married filing jointly; $9,550 for heads of households; $6,500 for other unmarried taxpayers; $6,500 for married filing separately. | $24,000 for married filing jointly; $18,00 for heads of households; $12,000 for other unmarried taxpayers; $12,000 for married filing separately. |
| Personal Exemption | $4,150 for each taxpayer and dependent. | No deduction. |
| Medical Expenses | Reduced by 10% of adjusted gross income. | Reduced by 7.5% of adjusted gross income. |
| State and Local Taxes | Deduction for all state and local income and property taxes. | Deduction is limited to $10,000, or $5,000 for married filing separately. |
| Mortgage Interest | Deduction for acquisition interest for mortgage of not more than $1 million, or $500,000 for married filing separately, as well as interest on home equity loans. | No deduction for home equity loans and, for residences purchased on or after 12/15/2017, deduction is allowed for acquisition interest for mortgage of not more than $750,000, or $375,000 for married filing separately. |
| Charitable Deduction | Deductions for cash contributions to public charities limited to 50% of adjusted gross income. | Deductions for cash contributions to public charities limited to 60% of adjusted gross income. |
| Miscellaneous Itemized Deductions | Deductions for costs of tax preparation, maintenance of income producing property, and other "miscellaneous itemized deductions" reduced by 2% of adjusted gross income. | No deduction for miscellaneous itemized deductions. |
| Limit on Itemized Deductions | Total itemized deductions are reduced by 3% of amount that adjusted gross income exceeds $320,000 for married filing jointly, $293,350 for a head of household, $266,700 for other unmarried individuals, and $160,000 for married filing separately, but not to less than 80% of deductions other than medical expenses, investment interest, and casualty losses. | No limit on itemized deductions. |
All of the changes described above apply to the years 2018 through 2025 except for the change in medical expense deductions, which only applies to 2018 and 2019.
The base for calculating future inflation adjustments has changed from the consumer price index for all urban consumers (CPI-U) to what is known as the chained consumer price index (C-CPI-U). This may affect calculations for 2018 that use factors that have not otherwise been changed by the new law, but are adjusted for inflation.
Changes for individual taxpayers that are not incorporated into the calculations include the new deduction for qualified business income received through entities other than corporations (new IRC section 199A), as well as changes in the tax treatment of alimony, contributions to ABLE accounts, student loan discharges, casualty loss deductions, moving expenses, wagering losses, and the alternative minimum tax.