The personal exemption is gone

To be perfectly clear, although the standard deduction has roughly doubled, it doesn't mean that people are getting double the tax break -- far from it, actually.

While the standard deduction has increased, the valuable personal exemption has gone away. The reasoning for this is that, in addition to a tax cut, lawmakers were also attempting to simplify the tax code. So instead of giving taxpayers a standard deduction and a number of exemptions, these two things were essentially combined into a higher standard deduction.

In plain English, a personal exemption is a certain amount of income Americans can exclude from their taxable income each year. In prior tax years, Americans could claim one personal exemption for themselves, their spouse, and one for each dependent.

In the 2017 tax year, each personal exemption was an effective $4,100 tax deduction. And there was no limit to the number of personal exemptions that could be claimed. For example, a married couple with six dependent children could claim eight personal exemptions. You can see how the higher standard deduction may not exactly be a gift -- especially for larger families.

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The Child Tax Credit has doubled

Although families with several children may feel the sting from the repeal of the personal exemption, there's some good news. Not only has the Child Tax Credit been increased, but more of the credit now is refundable and the income limitations are far less restrictive.

Briefly, it's important to mention that a credit is very different from a deduction. While a deduction lowers the amount of income that the government considers when taxing you, a tax credit actually reduces the amount of tax you owe, dollar for dollar. If you owe $1,000 in tax, a $1,000 credit would pay it off for you while a deduction just would lower the income level that your tax rate would apply to. In other words, a $1,000 credit is far more valuable than a $1,000 deduction.

Tax reform was good for the Child Tax Credit, which was doubled to $2,000 per qualifying child under age 17. As much as $1,600 of this amount is refundable -- meaning that it can be claimed even if the taxpayer's federal income tax liability is already zero. So even if a parent has little income or otherwise owes no federal income taxes, they could still take advantage and get this money back.

Furthermore, the income phase-out thresholds are significantly higher than the previous levels, which makes the credit available to far more Americans than in previous years. Several tax breaks phase out above certain income levels. The reason is that many tax benefits are intended to benefit low- to moderate-income taxpayers, not the rich. However, the range of people who can benefit from the Child Tax Credit has been significantly expanded.

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Most education tax breaks remain

The two popular tax credits for college expenses, the American Opportunity Credit and the Lifetime Learning Credit, both survived tax reform unscathed. These are designed to lower the tax bills of people who paid college tuition. The American Opportunity Credit applies to tuition paid toward a degree or certificate program but only for the first four years of college, while the Lifetime Learning Credit applies to nearly all tuition and fees.

However, it's worth noting that the tuition and fees tax deduction is no longer available, as the Bipartisan Budget Act of 2018 only made it available through the 2017 tax year -- although it's possible that Congress will still choose to extend it. Previously, certain taxpayers who couldn't qualify for one of the two credits could deduct as much as $4,000 worth of tuition and fees as an adjustment to income. Now, taxpayers who can't qualify for either credit are out of luck.

 

Expanded use of 529 savings plans

The two main college savings accounts, 529 savings plans and Coverdell Education Savings Accounts, or ESAs, both remain in the revised tax code. These accounts provide a tax-advantaged way for parents and other relatives to save and invest money for educational expenses such as tuition, fees, books, and certain other qualifying expenses. While there's no deduction for contributions to these accounts on federal tax returns, any money these accounts earn from investments can be withdrawn tax-free when used for a qualified expense.

However, a change was made to 529 savings plans to allow use of the funds for qualifying educational expenses at any level, not just for college. This was already the case with Coverdell ESAs. As one potential example, if you end up sending your child to a private high school, you could potentially use funds from their 529 savings plan to help pay for it.

 

Mortgage interest still is deductible, but...

The deduction for mortgage interest is one of the most popular U.S. tax breaks. In fact, tax benefits like these are often a primary reason Americans decide to buy a home. Fortunately for many homeowners, the mortgage interest deduction survived the tax reform efforts, but it did receive two major modifications.

First, the cap (or limit) on the total deduction allowed has been reduced to the interest on up to $750,000 of qualified residence debt, or mortgage principal on a primary or secondary home. This is down from the previous limit of $1 million, although mortgages obtained before December 15, 2017 are grandfathered in to the higher limit.

Second, the previous additional limit that allowed taxpayers to deduct interest on as much as $100,000 of home equity debt has been eliminated. To be clear, interest on a home equity loan (such as a HELOC) may still be used as a deduction, but if and only if the loan was used to substantially improve your home. In this case, it becomes qualified residence debt and is counted as part of your $750,000 cap.

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Self-Employed

• Self-Employed may receive Form 1099-K from third party providers like PayPal or Venmo for payments processed.

• The American Rescue Plan of 2021 changed third party payment processors reporting requirements to payments processed exceeding $600, which is down considerably from the original more than 200 transactions per year and exceeding an aggregate amount of $20,000 reporting requirement.

• On December 23, 2022 the IRS announced a delay in the lower reporting thresholds for third-party settlement organizations for tax year 2022 (taxes filed in 2023).

• On November 21, 2023 IRS announced another delay in reporting thresholds for third-party settlement organizations (TPSOs) set to take effect for tax year 2023( the taxes you file in 2024). As a result of this delay the TPSOs will not be required to report tax year 2023 transactions on a Form 1099-K to the IRS or the payee for the lower, over $600 threshold. Per the IRS, this means that for tax year 2023 the existing 1099-K reporting threshold of the aggregate of more than $20,000 in payments from over 200 transactions will remain in effect.

• You may receive a Form 1099-NEC or Form 1099-K reporting income, but don’t forget to deduct self-employed expenses like business mileage at 65.5 cents per mile for 2023.

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