The “Tax Cuts and Jobs Act,” a 1,097-page bill, should provide a boost to the U.S. economy and bring relief to many taxpayers. However, not everyone will benefit. In this post, I will highlight a few of the changes and discuss its potential impact.
The standard deduction has been increased (see table below).
|Head of Household||$9,350||$18,000||$8,650|
|Married Filing Jointly||$12,700||$24,000||$11,300|
Since taxpayers will use the greater of their standard deduction or their itemized deductions, fewer taxpayers will itemize. This could have a negative impact on charitable giving since charitable contributions are only deductible to taxpayers who itemize.
The personal exemption, which has been part of the tax code (Section 151) and has existed in some form since 1862, has been eliminated.
In 2017, for example, taxpayers could deduct $4,050 for each dependent. Therefore, a family of five (ex: mom, dad, three children) could deduct $20,250 from their income (5 x $4,050). If the higher standard deduction and lower marginal tax brackets fail to compensate for the amount lost to the personal exemption, larger families will likely pay more federal income tax.
Itemized Deductions-Form 1040, Schedule A
Medical and Dental Expenses
These expenses were deductible to the extent they exceeded 10% of adjusted gross income (AGI) and only if you itemized (i.e. Form 1040, Schedule A). Under the new law, this percentage has been reduced to 7.5%, retroactive to Jan. 1, 2017. For example, if you itemize, incur $12,000 of qualified medical expenses, and your AGI is $100,000, you can deduct $4,500 ($12,000 – ($100,000 x 7.5%)). Using the former 10% of AGI limit, your deduction would only be $2,000 ($12,000 – ($100,000 x 10%)). For more on qualified medical and dental expenses, see IRS Publication 502.
State, Local and Property Taxes
The deduction for state and local income, sales and property taxes has been modified. Under the new law, there is a maximum deduction of $10,000 ($5,000 for married filing separately).
Home Mortgage Interest (Primary Residence)
The amount of deductible mortgage interest has been reduced on mortgages acquired after Dec. 14, 2017. For example, if you purchased a primary residence with a mortgage of $1 million on or prior to this date, you may deduct the interest on the entire loan. After Dec. 14, 2017, the maximum loan amount on which you may deduct mortgage interest has been reduced to $750,000.
Home Equity and Vacation Home Loan Interest
The deduction for the interest paid on a vacation home or a home equity loan has been eliminated.
Miscellaneous Itemized Deductions
Tax preparation fees, investment fees, unreimbursed employee expenses and other miscellaneous deductions have been eliminated. Prior to tax reform, they were deductible to the extent they exceeded 2.0% of AGI.
Next time, we’ll look at a few other changes, including those affecting businesses and high-net-worth individuals.
Article published by ThinkAdvisor Jan 26 2018
Written by Mike Patton