What the New Tax Law Means for You

As you prepare your 2019 income tax return, you will continue to see how the Tax Cuts and Jobs Act of 2017 (TCJA), enacted into law at the end of 2017, impacts you.

This article is intended to highlight some of the more significant changes under this new tax law and explain what those changes could mean for you. As with all new laws, some provisions will help you and some will hurt your tax position.

The Good

Several changes to the tax law will be very beneficial for most taxpayers. First, tax rates are generally lower by 1-2% at almost every income level. While rates went up for some limited income bands, the overall impact for most taxpayers is a lower overall tax rate.

The standard deduction was doubled to $12,000 for single filers and $24,000 for married couples (increased to $12,200 and $24,400 respectively for 2019), meaning that there is a better chance you won't have to track itemized deductions. In fact, it is estimated that 29 million taxpayers will no longer need to track itemized deductions because the standard deduction will be greater.¹

Along the same simplification lines, the TCJA greatly reduced the impact of the Alternative Minimum Tax (AMT), which is an alternative tax calculation originally intended to ensure wealthy individuals don't benefit too much from deductions. Largely because the AMT was not indexed for inflation, it has become broadly applicable to even middle-class taxpayers. The TCJA limits the broad application of the AMT by increasing the income exemption for single filers to $70,300 and for married filers to $109,400 ($71,700 and $111,700 for 2019). It also greatly increased the phase-out of the exemption so that some of the exemption is provided up to $500,000 of income for single filers and $1 million of income for married filers. As a result, the number of taxpayers who pay the AMT will dramatically decline from 5 million to around 200,000.²

The child tax credit has doubled from $1,000 per child to $2,000. The credit, which offsets your tax liability dollar for dollar, is capped for single filers at $200,000 of income and for married filers at $400,000 of income.

The Bad

Personal exemptions for family members and dependents are no longer available. This may increase your taxable income.

Miscellaneous itemized deductions, which offset income to the extent they exceeded 2% of adjusted gross income, are no longer available. These now prohibited deductions include tax return preparation fees, investment advisory fees, job hunting expenses, the cost of a safe deposit box, and casualty losses (unless associated with a Presidentially declared disaster zone). The inability to utilize these deductions may increase your income.

The deduction for state and local taxes, including your state income tax and property tax, are now capped at $10,000. For those who pay property tax and live in a state with an income tax, this may significantly reduce your itemized deductions.

Mortgage interest from a new loan secured by a principal residence is now deductible only for the first $750,000 of loan value. The prior limit was $1 million, and loans taken out prior to 2018 are grandfathered. This could reduce deductible mortgage interest for some individuals.

The interest on a home equity loan or line of credit is no longer deductible, unless it is used for improvements to your principal home. Under prior law, such interest was deductible on up to $100,000 of loan value for any use. The $100,000 cap continues to apply for purposes of the available deduction for home improvements.

The above limits all serve to increase your total taxable income amount. However, depending on your individual circumstances, the lower tax rates, increased standard deduction, reduced application of the AMT, and increased child tax credit may provide a greater overall tax benefit for you.

The Not So Ugly

With any tax law change, there are winners and losers. For the losers, the result is ugly because the bottom line will be a greater tax liability. The good news is the losers, or those who will pay more under the new law, are estimated to be only 6% of taxpayers. Some 65% of taxpayers should do better under the new law and the rest should be around even.³ For those who will pay more, the end result may be ugly, but given that most will pay less or about the same, the overall outcome is rather positive.

Planning Ideas

Given that many taxpayers may no longer itemize deductions, consider whether you can bunch your deductions to increase your chances of being able to deduct in alternative years. For example, if you make a charitable gift each year and your deductions are close to but do not exceed the standard deduction, consider doubling your gift every other year to get a deduction benefit.

Longer term planning can leverage the temporary nature of the TCJA individual income tax changes. For the most part, the individual income tax changes expire at the end of 2025 and the former higher income tax rates return. Assuming you are paying less income tax now, the period until 2026 could be a time when it makes sense to convert traditional IRA funds to a Roth IRA, or to make contributions to a Roth 401(k) rather than a traditional 401(k). That is, if you are paying at a lower rate now than you will later, it might be better to incur your tax liability now.

Please consult your tax and legal advisors regarding your particular circumstances.

(1) According to the Joint Committee on Taxation, 47 million taxpayers itemized deductions in 2017 and 18 million taxpayers will itemize deductions in 2018.

(2) The Tax Policy Center.

(3) The Tax Policy Center.

Robert A. Fishbein, J.D., LL.M., is Vice-President and Corporate Counsel with Prudential, where he leads the product tax and legislative functions in the Corporate Tax Department. He is a frequent speaker and author on tax, retirement and financial planning matters.

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