A brief overview of changes by the Tax Cuts and Jobs Act
Lawmakers recently passed the largest reform of tax law since the Tax Reform Act of 1986 and it will affect almost every individual and every business. For years, itemized deductions have allowed taxpayers, if they qualified, to reduce their taxable income by claiming a variety of deductions. However, the new Tax Cuts and Jobs Act has eliminated or even restricted many itemized deductions after December 31, 2017. This article highlights Schedule A changes and how individuals are impacted.
Standard Deductions and Personal Exemptions:
The standard deductions nearly double to $24,000 for married filing joint, $12,000 for single, and $18,000 for head of household filers. The deduction for personal exemptions has been suspended by reducing the exemption to zero. Due to these changes, it is anticipated fewer people will itemize.
Mortgage & Home Equity Indebtedness Interest Deduction Limited
The deduction for interest on home equity indebtedness is suspended under the new tax law. The deduction for mortgage interest is limited to underlying indebtedness up to $750,000 married filing joint (previously $1 million) and $375,000 for married filing separately. The new lower limit does not apply to any acquisition indebtedness incurred prior to December 31, 2017. The old limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness so long as the indebtedness does not exceed the amount of the refinanced indebtedness.
Medical Expense Deduction Threshold Temporarily Reduced
For tax years beginning after December 31, 2016 and ending before January 1, 2019, the threshold on medical expense deductions is reduced to 7.5% for ALL taxpayers. In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI does not apply to tax years beginning after December 31, 2016 and ending before January 1, 2019.
State and Local Tax Deduction Limited
For tax years after December 31, 2017, a taxpayer may claim an itemized deduction of up to $10,000 for state and local income taxes or state and local sales tax, plus real property taxes. A prepayment provision disallows paying income taxes for subsequent tax years in advance in order to claim a current year deduction.
Charitable Contribution Deduction Limitation Increased
For contributions made in tax years beginning after December 31, 2017 the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding this limit are generally allowed to be carried forward and deducted up to five years, subject to the later year’s ceiling. Also, beginning after December 31, 2017, no charitable deduction is allowed for a payment to an institution of higher education in exchange for rights to purchase athletic event tickets.
Other Write-Offs Eliminated
Under the new tax law for tax years beginning after December 31, 2017 the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. This includes deductions such as employee business expenses, brokerage and IRA fees, hobby expenses, and tax return preparation costs.
If you would like to discuss these changes, please contact your Blue & Co. service team member or local office.