Tax Reform Changes How You Itemize

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The media is abuzz with Tax Reform news, here to allay your confusion regarding the cut to some deductions and tax rates is my latest blog post. 

The tax rates change has been the most publicized but there are many deductions on the chopping block that will drastically change how you prepare your taxes and/ or your bottom line. 

Most taxpayers who itemized on Schedule A had substantial medical expenses (deductible over 10% of their AGI), state & local income taxes, real & personal property taxes, home mortgage interest, home equity loan interest, charitable contributions, and other miscellaneous deductions over 2% of their AGI. If the total of such itemized deductions went over the standard deduction based on your filing status below*, one would itemize. 

*The standard deduction rates for filing your 2017 tax returns are as follows: 

                     Filing Status                                         Standard Deduction Allowed

                        Single                                                           $6,350

  Married Filing Jointly & Surviving Spouse                            $12,700

            Married Filing Separately                                           $6,350

                Head of Household                                                $9,350

The personal exemption amount, a deduction available for yourself, spouse and your dependents for 2017 is $4,050 each.

If you did not have enough expenses to file the Schedule A, then your total deduction was the standard deduction plus the $4,050 times the number of dependents you claimed including yourself on your tax return. 

What Has Changed After Tax Reform?: 

1. The standard deductions rates are now as follows:

                   Filing Status                                         Standard Deduction Allowed

                        Single                                                           $12,000

  Married Filing Jointly & Surviving Spouse                              $24,000

            Married Filing Separately                                           $12,000

                Head of Household                                                $18,000

The personal exemption amounts are no longer available. 

2. Medical & Dental Expenses: 

Going line-by-line on Schedule A, the first deduction for medical & dental expense is in place for 2017 & 2018 with a threshold of 7.5% of your AGI(adjusted gross income). This threshold is lower now than the 10% of your AGI that had been in place for 2016. 

Since this provision is retroactive, it affects your current tax return if you have had high medical bills for 2017. 

3. State & Local Taxes {SALT}: 

State, local sales taxes, income taxes and property taxes remain in place under the tax reform package. However, the deduction is capped at $10,000 (discussed below). Foreign real property taxes cannot be deducted under the new provision. 

What Are SALT Caps?:

The deduction for SALT remains, however there is a $10,000 cap on this deduction. This means that the total of state & local sales, income taxes, and property taxes cannot exceed $10,000 ($5,000 for those filing married separately). If these taxes including foreign real property taxes are being deducted on a Schedule C, Schedule E or Schedule F, then there is no cap on the total. 

Also, amounts paid in advance in 2017 for state or local income tax imposed for 2018 will be treated as paid in 2018. There is no restriction on property taxes under this rule.

4. Home Mortgage Interest: 

Home Mortgage or "acquired indebtedness" has been defined under the new law as "indebtedness that is incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer and which secures the residence".  Please note that a home equity indebtedness is not considered acquisition indebtedness. 

Hence any home equity interest deductions that were available to you on your residence or vacation home is not available any more. 

There is also a limit on acquisition debt post December 15th, 2017 of $750,000 ($375,000 for married filing separate status). Before December 15th, 2017 limits stand at $1,000,000. 

5. Charitable Contributions: 

There is not much change on this one. The major change here is that payments made to a college athletic board in exchange for tickets in a stadium are no longer deductible. 

6. Casualty & Theft Losses: 

Only losses incurred in federal disaster areas are deductible, other than that this deduction is repealed for years 2018 to 2025. 

7. Job Expenses & Miscellaneous Deductions Subject to 2% of AGI: 

All miscellaneous deductions that were subject to the 2% of the AGI limit will now be repealed until 2025. These are unreimbursed job/ employee expenses including travel & mileage and the home office deduction.  

8. Limit On Itemized Deductions: 

For all it is worth, there is no limit on itemized deductions for years 2018 to 2025. 

If you would like to check how you will fare under the new tax provisions, here are the new tax rates from the bill: 

   

The Internal Revenue Service has to issue regulations in order for all the above changes to be implemented and that will come out sometime in 2018. The above information is complicated to say the least, now would be a good time for you to talk to an Enrolled Agent to see how the changes affect you and make decisions based on their expert advice. 

Bibliography: Tax Cuts And Jobs Act 2017; Itemized Deductions Schedule A

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com