The new Tax Cuts and Jobs Act (TCJA) includes a number of changes that affect families. Here are some of the big ones.
No more personal and dependent exemption deductions
For 2018-2025, the new law eliminates personal and dependent exemption deductions, which would have been $4,150 each for 2018 under prior law.
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However, for various tax provisions that make reference to persons for whom dependent exemption deductions are allowed — such as the eligibility rules for head of household filing status, the child and dependent care tax credit, the education tax credits, and child-related tax breaks for noncustodial parents after divorce — the dependent exemption deduction is still deemed to exist for 2018-2025. It's just equal to zero. Strange but true.
Bigger standard deductions
For 2018-2025, the TCJA almost doubles the standard deduction amounts. The 2018 standard deductions are as follows:
- $12,000 for singles (up from $6,350 for 2017)
- $24,000 for joint-filing married couples (up from $12,700)
- $18,000 for heads of households (up from $9,350)
Additional standard deduction amounts for elderly and blind individuals are still allowed under the TCJA ($1,300 for each elderly or blind spouse and $1,600 for elderly or blind person who is unmarried).
Key point: Taken together, the elimination of dependent exemption deductions and bigger standard deductions obviously helps some families and hurts others. For instance, non-itemizers with no kids will come out ahead while those with lots of kids who don't benefit from increased standard deductions will draw the short straw.
More generous child tax credit rules
For 2018-2025, the TCJA increases the maximum child credit to $2,000 per under-age-17 qualifying child (up from $1,000 for 2017). Up to $1,400 can be a refundable credit, which means you can collect that amount even if you don't owe any federal income tax.
Also, the income levels at which the child tax credit is phased out are significantly increased for 2018-2025, so many more families with under-age-17 children will now qualify. Specifically, the adjusted gross income (AGI) threshold for the child credit phase-out rule for 2018-2025 is $400,000 for married joint-filing couples and $200,000 for all others. Under prior law, the thresholds were much lower: $110,000 for married joint-filing couples, $75,000 for unmarried individuals, and $55,000 for those who use married filing separate status. Under the phase-out rule, $50 of child tax credit is phased out for every $1,000 of AGI above the applicable threshold. Any portion of $1,000 of excess AGI counts as a full $1,000 of excess AGI.
Example 1: Nora is a single taxpayer with two dependent children who both qualify for the child tax credit in 2018. Her tentative credit under the new law is $4,000. The credit phase-out threshold for Nora is $200,000 of AGI. If her 2018 AGI equals or exceeds $280,000, her credit will be completely phased out: ($80,000/$1,000 = 80; 80 x $50 = $4,000 phased-out amount, which is the whole enchilada).
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- Variation 1: If Nora's 2018 AGI is $220,000, only $1,000 of her credit will be phased out ($20,000/$1,000 = 20; 20 x $ 50 = $1,000 phased-out amount). So she gets a $3,000 credit.
- Variation 2: If Nora's 2018 AGI is $220,001, $1,050 of her credit will be phased out ($21,000/$1,000 = 21; 21 x $50 = $1,050 phased-out amount). So she gets a $2,950 credit.
$500 credit for dependents who are ineligible for child tax credit
For 2018-2025, the TCJA establishes a new $500 credit for dependents who are not under-age-17 children who qualify for the $2,000 child credit.
For example, qualifying dependents can include: (1) a dependent child who lives with you for over half the year and is over age 16 and up to age 23 if he or she is a student and (2) a host of non-child relatives (grandchild, sibling, stepbrother, stepsister, father, mother, grandfather, grandmother, stepfather, stepmother, niece, nephew, uncle, aunt, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, and others).
Apparently, these non-child relatives will only qualify for the $500 credit if they have no gross income for the year, because the tax-law language says they cannot have gross income in excess of the dependent exemption deduction amount. For 2018-2025, the dependent exemption deduction is deemed to still exist, but it equals $0. In addition, all these folks would also have to receive over half of their support for the year from you and be a U.S. citizen, U.S. national, or U.S. resident. Individuals who are not relatives can also be qualifying dependents if they meet the preceding requirements and live with you as a member of your household for the year.
Observation: The apparent requirement that non-child dependent cannot have any gross income to be eligible for the $ 500 credit might be a legislative oversight where the drafter of the provision failed to take into account the fact that the dependent exemption for 2018-2025 is $0. If it's not an oversight, eligibility for the $500 credit will be a rarity.
Education breaks unchanged, except for 529 plan liberalization
The TCJA leaves all the education-related tax breaks untouched, with one exception:Tthe new law liberalizes the Section 529 plan rules to allow federal-income-tax-free withdrawals of up to $10,000 per year to cover tuition at a public, private, or religious elementary or secondary school. This change is permanent, for qualifying withdrawals made after 12/31/17. However, since 529 plans are operated by states, this pro-taxpayer change may or may not be allowed by your plan.