Merry Christmas to us, we have a new tax law! The big question you are probably asking is how does this new tax law impact me? First of all, remember that most of these changes will not go into effect until the 2018 tax year, starting January 1, 2018 for individuals. Here are a few key parts of the law that might be of importance to you.
New Tax Brackets (Individuals)–10%, 12%, 22%, 24%,32%, 35%, 37%
These brackets are only for regular taxable income. There is no change to long-term capital gain and dividend brackets with rates of 0%, 15%, 20%.
The standard deduction amount has nearly doubled: single $12,000, head of household $18,000, MFJ $24,000. With this higher standard deduction, personal exemptions for you, spouse, children, and other dependents has been eliminated. Many taxpayers will find they will not itemize their deductions on schedule A anymore, simplifying their tax return to some extent. One tax planning strategy for 2017 if you don’t think you will be itemizing in 2018 is to bunch your deductions (prepay charitable contributions, real estate taxes, state taxes) before December 31.
State Tax/Real Estate Tax
If you do find yourself itemizing in 2018 and subsequent years, state/local income taxes and real estate taxes will be capped at $10,000 combined ($5,000 if MFS). You may still opt for state sales tax instead of income tax. This cap is only for Schedule A real estate taxes for primary and second homes. If you have a for-profit rental property (Schedule E), real estate taxes are deductible in full. A 2017 tax planning strategy for this category like bunching itemized deductions above, if you plan to go over the $10,000 combined cap in future years and will not be subject to AMT in 2017, prepay any 2017 income or real estate tax liability before year end (ex: pay 4th quarter state income tax quarterly estimate before December 31 instead of waiting until January 15, 2018).
Other Itemized Deductions
Medical expenses on Schedule A currently have a 10% threshold of AGI (meaning qualifying out-of-pocket medical expenses have to exceed 10% of AGI to be deductible) but the new tax law decreases this back to the 7.5% AGI threshold for 2017 & 2018. In 2019 the threshold moves back up to 10%. All miscellaneous itemized deductions subject to the 2% AGI threshold have been eliminated. This includes tax preparation fees, unreimbursed employee expenses, investment expenses, safe deposit box, and more. The personal theft and personal casualty losses have also been eliminated as deduction except for certain casualty losses in federally declared disaster areas. If you are not subject to AMT in 2017 and have significant miscellaneous itemized deductions, you may look into prepaying expenses like unreimbursed employee expenses in 2017.
The Schedule A mortgage interest deduction will be limited to debt of $750,000 for homes placed under contract after 12/16/17 (must close before 4/1/18). If you purchased a home under the old $1 million/$500,000 cap those rules still apply and if you refinance but the amount refinanced does not exceed the original loan you can stay under those rules. Starting in 2018 the Schedule A interest on HELOC loans will no longer be deductible.
Child Tax Credits
With personal and dependent exemptions now gone, the child tax credit has been doubled to $2,000 for dependent children under the age of 17. Up to $1,400 of this credit per child can be refundable, replacing the additional child tax credit. The tax law also gives a $500 non-refundable credit for other non-child dependents (think parents, children over 17 or disabled, etc). Both credits start phasing out at incomes of $200,000 (single) or $400,000 (MFJ) which is significantly higher than current phase-out rules ($110,000 MFJ).
Alternative Minimum Tax (AMT)
Even though it wasn’t completely eliminated, many of the income preference items that go into the AMT calculation have been (dependent exemptions, state & local income taxes, miscellaneous itemized, etc). Also the AMT exemption limits have been increased to $54,300 single and $84,500 MFJ. This change should make it so less taxpayers will be subject to AMT.
- Moving Expenses will not be deductible after 2017.
- Alimony for divorce settlements after December 31, 2018 will no longer be tax deductible (payor) or included in income (payee).
- The estate tax exemption has doubled to $10.98 million for married couples.
- No individual tax mandate for health insurance after 2017.
Tax Law Remaining the Same (even after significant talk of changing)
- Home Exclusion laws stay the same–live in and own the home 2 out of 5 years as a primary residence and exclude $500,000 (MFJ) of gain from taxable income.
- Student Loan interest is still deductible up to $2,500 with income limitations.
- Unreimbursed Teacher Expenses are still deductible up to $250.
- Electric Car Tax Credit is still valid.
- Education Credits like the American Opportunity Tax Credit are the same. 529 plan money can now be used to pay for up to $10,000 of expenses for public, private, or religious elementary or secondary schools.
As the saying goes, “the only things that is constant is change”, above are the biggest points of the new tax law as it stands right now but we will more than likely see changes/addendum come out in the coming months and years. For most taxpayers, the biggest change on their tax return will be taking the standard deduction instead of itemizing, not claiming dependent exemptions but instead utilizing the expanded child tax credit, and having lower taxes with the new tax brackets. For self-employed individuals or rental property owners, no change to income and expense items or self-employed taxes.
If you have specific questions about how your tax bill will be changed in 2018, please contact a tax professional.