The tax reform legislation enacted in the United States at the end of 2017 contains a number of major changes that will likely impact a wide range of taxpayers.
As you navigate this new regulatory landscape, there are a few important details and provisions to keep in mind. Here are a few that you can use to help guide your assessment and your next conversation with a financial professional.
Tax Return Opportunities
The standard deduction has increased. A key component of the tax reform bill is an increase in the standard deduction for 2018 and beyond, rising from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly.
The child tax-credit has expanded. The child tax credit has increased from $1,000 to $2,000 and now includes a provision for parents who don’t meet the earning threshold to claim up to $1,400 in credits. Meanwhile, the income level for eligibility has increased from $110,000 to $400,000 for a married couple filing jointly.
The new rules also allow for a tax credit of up to $500 for the care of each non-child dependent, which can include aging parents.
Bear in mind that tax credits are a direct reduction in the amount of tax that you will pay. These credits are more valuable then deductions and can have a direct impact on disposable income available for investment or saving for retirement.
529 accounts now cover elementary and high school. Parents can now use 529 accounts to cover the costs of elementary and high school expenses—a potential boon for those who send their kids to private schools. It is important to continue to save for the cost of college even if you’re using your 529 account for elementary and high school, as college in most cases will be a much higher expense.
Alternative minimum tax exemption has gone up. The exemption for the alternative minimum tax (AMT) has been increased from $54,300 to $70,300 for individuals and from $84,500 to $109,400 for married couples. The exemptions phase out at $500,000 for singles and at $1 million for married couples, meaning that fewer taxpayers are subject to this tax, which was originally meant for the wealthy but has increasingly been hitting the middle-class.
Estate tax exemption has increased. The estate tax exemption doubles to $11.2 million for single taxpayers and to $22.4 million for married taxpayers. This includes both bequests upon death and gifts made during their lifetimes. While this won’t impact most taxpayers, it is an important issue for those directly impacted and a great reminder for those who have not recently updated their estate plans—regardless of net worth.
Tax Return Restrictions
It may be tougher to itemize deductions. The increase in the standard deduction means that it will be harder for many to itemize deductions. With the standard deduction at $12,000 for single and $24,000 for married filing jointly, this means that those with itemized deductions below those levels may benefit from using the standard deduction, as this will result in a lower tax bill.
With these higher standard deduction levels, the direct tax benefit of expenses will be lost. Examples of common itemized deductions that could be affected are mortgage interest, local income and property taxes (see discussion below for more on this point) and charitable contributions.
SALT deductions are capped. The provision to cap the deduction for SALT, or State and Local Taxes, is one of the most controversial changes in this legislation. The cap on itemized deductions for all of these taxes combined is now $10,000, which will likely impact those who live in states with high property taxes and high state income taxes such as California, New York, New Jersey, Minnesota, and Illinois.
In fact, the combination of mortgage interest, property taxes and state income taxes are often the largest components of a taxpayer’s itemized deductions. The cap will limit the ability to itemize for some.
The mortgage interest deduction has been capped. The new cap on the amount of mortgage debt eligible for a mortgage interest deduction may affect a person’s decision on where to buy a home and how much they are willing to borrow to purchase it.
Mortgages currently in place will not be impacted. For mortgages beginning in 2018, only the first $750,000 of mortgage debt will be deductible. While this might seem like a high amount, those living in high-cost areas can easily have mortgages in this range or higher. Considering all of the changes in this area, analyzing the true cost of home ownership could prove surprising to some home buyers.
Alimony payments will not be deductible. For those going through divorce proceedings, it will have been best, from a financial standpoint, to have completed the process in 2018. Tax reform eliminated the deduction for alimony payments by the ex-spouse beginning in 2019—which will make the after-tax cost of those payments higher and could affect the level of alimony agreed upon in a settlement.
The personal exemption will disappear under the new rules. The amount for 2017 was $4,050 for each person claimed—including yourself and a spouse—this partially offsets the benefits of the increased child tax credit and personal exemptions.
The deduction for moving expenses went away in 2018 as well. Previously, the cost of moving for a work-related reason—provided those costs met certain tests—was deductible. No longer.
The medical expense deduction remains, but for tax years 2017 and 2018 the threshold is lowered to 7.5% of adjusted gross income. The threshold returns to 10% in 2019. This is a planning opportunity for taxpayers with medical expenses to take full advantage of these lower thresholds.
While you may not need to be a tax expert, having a firm understanding of the recent U.S. tax reform changes is a must for individuals and business owners. Be sure to engage the services of a tax professional who can guide you through these new rules and help map the best route for your situation.