Tax Reform 101

Updated for filing 2021 tax returns

The Tax Cuts and Jobs Act of 2017 (TCJA) brought about the biggest tax reform in decades, so almost every American has been affected in some way.

Standard Deduction Amounts and the Personal Exemption

Taxpayers used to get a personal exemption amount of $4,050 per person in 2017 that would reduce taxable income. The TCJA repealed the personal exemption, however, in favor of raising the standard deduction. The standard deduction also reduces your taxable income but only applies to each filer, not each person in the household.

Taxpayers can still itemize deductions, but many won’t have enough individual deductions to merit itemizing. This is also because all itemized deductions have been repealed except state and local income taxes (capped at $10,000), mortgage interest, medical expenses, disaster losses (attributable to a federally declared disaster), charitable contributions, and other deductions not subject to the 2% floor. Deductions for unreimbursed employee expenses, tax preparation fees and safety deposit boxes have been eliminated.

Child Tax Credit

Note: For 2021, the CTC is higher and fully refundable due to COVID-19 relief legislation. The numbers below are changes the TCJA made and don’t apply to the tax return you file in 2022.

The Child Tax Credit (CTC) was raised to $2,000, and $1,400 of that amount can be refundable (meaning that, if your tax liability is reduced to zero, you could still get up to $1,400 in refund money). Plus, qualifying dependents who are not children qualify for a temporary $500 nonrefundable credit.

Be aware that there are phaseouts for the Child Tax Credit: married taxpayers filing jointly with an AGI greater than $400,000 and all other taxpayers with an AGI greater than $200,000 will begin to phase out.

Affordable Care Act

The penalty on individuals for failing to maintain minimum essential health coverage has been reduced to $0.

Medical expenses

You can deduct medical expenses that exceed 7.5% of your income.

Mortgage interest

Single taxpayers can deduct interest up to $750,000 on new mortgage debt (down from the former $1,000,000 limit), and married couples filing separately can deduct up to $375,000 each (down from the former $500,000 limit).

Mortgage loans that started before December 15, 2017 will not be affected by the new deduction limit.

You may also be able to deduct interest paid on a home equity loan, provided the loan is to buy, build or substantially improve your home.

Borrowing against your home for any other purpose, such as repaying credit card and various other debts, is no longer deductible.

Moving expense reimbursements

Unless you are an active-duty member of the Armed Forces who moves due to military orders, you can no longer claim the exclusion for moving expenses.

Alimony

The payer spouse can no longer deduct alimony from their taxable income, and the payment is no longer included in the receiving spouse’s taxable income, for divorce or separation agreements executed after Dec. 31, 2018.

This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:

• Changes the terms of the alimony or separate maintenance payments; and
• States that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

However, as long as any modifications are not one described in the preceding paragraph, divorce or separation agreements made on or before December 31, 2018 will be grandfathered in based on the old rules: Generally, alimony or separate maintenance payments are deductible from the income of the payer spouse and includable in the income of the receiving spouse.

Section 529 plans

The distribution limitation of $10,000 now applies on a per-student basis instead of a per-account basis. These distributions can now be used for public, private, or religious education in elementary or secondary schools.

Qualifying expenses include:

• Tuition and fees
• Books, supplies, and equipment
• Expenses for special needs services needed at an eligible postsecondary school
• Expenses for room and board for students enrolled at least half-time (with some limitations)

Vehicle depreciation

If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction in 2021 is:

• $10,200 for the first year
• $16,400 for the second year
• $9,800 for the third year
• $5,860 for each later taxable year in the recovery period

If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is:

• $18,200 for the first year
• $16,400 for the second year
• $9,800 for the third year
• $5,860 for each later taxable year in the recovery period

Qualified Business Income (QBI) 20% deduction

The QBI deduction is for individuals who have partnership, S corporation, LLC, or sole proprietorship income—which includes the millions of freelancers and contractors out there working for themselves and filing a Schedule C to report income on their tax return. The QBI deduction is worth 20% of your “qualified business income” (essentially your net profit).

You don’t have to itemize your deductions in order to claim the QBI deduction, but the business must be conducted in the U.S.

For taxpayers whose taxable income exceeds a statutorily-defined amount, referred to as the “threshold amount,” their QBI deduction may be limited.

Certain rules apply to Specified Service Trades or Businesses (SSTBs). An SSTB is any business activity where revenue is generated from a specialized skill or service like health, law or medicine.

Bonus depreciation

The bonus depreciation percentage doubled from 50% to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. Additional first year depreciation is available on used property.