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In our previous newsletter we elaborated on standard deductions vs. itemized deductions for your 2017 tax returns.
It is now a good time to inform you of the changes the new tax reform bill signed into law on December 22 of last year brings along both for the standard and itemized deductions effective 2018.
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As we mentioned before, the standard deduction is the amount that you can deduct from your income before calculating your tax liability if you do not itemize your deductions.
The 2018 standard deduction for married filing jointly will increase to $24,000 for joint filers; $12,000 for single taxpayers; and $18,000 for heads of households. The increased deduction ends after 2025.
As for personal exemptions, (the $4,050 amount for 2017 that you were able to deduct from your income for every taxpayer and most dependents claimed on your return) the new law eliminates personal exemptions entirely. The exemption returns after 2025.
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- There are many changes brought by the new law in the itemized deductions on Schedule A as well, and below you can find a summary of these changes.
The itemized deduction limits are repealed through the 2025 tax year.
The state and local property and real estate taxes deduction will be capped at $10,000. The deduction limit ends also after 2025.
The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
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For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction.
Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return.
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The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home. With the new law, for current mortgage holders, there is no change. But the deductible limit drops to $750,000 for new debt incurred after Dec. 31, 2017.
Also, homeowners may not claim a deduction for existing and new interest on home equity debt, beginning Jan. 1, 2018. The mortgage deduction changes expire after 2025.
Taxpayers can deduct medical expenses that exceed 7.5 percent of AGI in 2017 and 2018, but the new deduction level ends Jan. 1, 2019.
Charitable donations remain deductible under tax reform. The rules are largely the same with a few changes. The percentage limit for charitable donations in cash by an individual taxpayer to public charities and certain other organizations increases from 50% to 60%.
The deduction for personal casualty and theft losses is repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster.
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Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018 through 2025. This includes deductions for unreimbursed employee expenses and tax preparation expenses.
The elimination of unreimbursed employee expenses only affects taxpayers who claim an employee-related deduction on Schedule A. If, as a business owner, you typically file a Schedule C, your business-related deductions are not affected by the elimination of Schedule A deductions.
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Changes to Other Deductions for 2018 and Beyond
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| The Child Tax Credit would increase to up to $2,000 per child, and the first $1,400 would be refundable according to the TPC analysis, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit would increase from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after 2025. |
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Regarding the Estate Tax, the top rate of 40 percent would apply to estates valued at more than $11.2 million ($22.4 million for couples). The increased levels expire after 2025.
The Alternative Minimum Tax exemption amounts will increase to $70,300 for single filers and $109,400 for joint filers and will phase out for those taxpayers at $500,000 and $1 million, respectively, according to the nonpartisan Tax Policy Center’s analysis of the bill. These changes will end after 2025 as well.
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The IRS released recently new withholding tables. These tables are designed to produce the correct amount of tax withholding (avoiding under- and over- withholding of tax) for those with simple tax situations. This means that people with simple situations might not need to make any changes. Simple situations include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.
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| People with more complicated financial situations might need to revise their W-4. Among the groups who should check their withholding are: |
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Two-income families. |
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People with two or more jobs at the same time or who only work for part of the year. |
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People with children who claim credits such as the Child Tax Credit. |
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People who itemized deductions in 2017.
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People with high incomes and more complex tax returns. |
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Taxpayers with more complex situations (including those who owe self- employment tax, the alternative minimum tax, or tax on unearned income from dependents, and people who have capital gains and dividends) might need to use Publication 505, Tax Withholding and Estimated Tax, expected to be available on IRS.gov in early spring, instead of the Withholding Calculator.
The tools you can find on the IRS website are useful, but if you want to make sure you’re making the right decisions in all your dealings with the IRS, and especially so when new rules are in place, help form a tax professional is invaluable and more than necessary. |
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