The 2017 Tax Act will take some time to fully absorb and to sort out all its implications and impacts. In the meantime, here is a very cursory overview of the law and some of the provisions that may affect you and your family.
Standard Deductions. Taxpayers who do not itemize deductions take the “standard” deduction. The Act basically doubles the standard deduction to $24,000 (married, filing jointly), $18,000 (head of household), and $12,000 (single taxpayer); and retains the additional $600 deduction if you are at least age 65 or blind.
Personal Exemptions. The Act eliminates personal exemptions, or the current $4,050 exemption that you can claim for yourself and your dependents.
Itemized Deductions. The Act eliminates or modifies most itemized deductions.
Medical and Dental Expenses. Under current law, medical and dental expenses must exceed 10% of your “adjusted gross income” (AGI) to be deductible. For 2017 – 2018 the Act applies a 7.5% threshold. As of 2019, the threshold reverts to 10%.
SALT (State and Local Taxes). SALT allows taxpayers to deduct payment for state and local income taxes, real property taxes and various other local taxes. The Act caps the SALT deduction for all state and local taxes at $10,000 for married couples fling jointly and single taxpayers, and at $5,000 for a married individual filing separately. These amounts are frozen and will not be indexed for inflation. The Act also eliminates deductions for foreign real property taxes.
Home Mortgage Interest. The Act changes the rules regarding home mortgage interest. Mortgage interest paid on acquiring, building or substantially improving a principal residence and one other residence (e.g., a vacation home) remains deductible, although the total debt cannot exceed $750,000 (down from $1 million). Mortgages incurred on or before December 15, 2017 are grandfathered, however, if such a mortgage is refinanced after that date, and the proceeds from the refinance exceed the actual refinanced amount, or the refinancing extends the length of the original mortgage the grandfathering will be affected. Also, as of 2018, interest on home equity indebtedness is no longer deductible. Existing home equity loans are not grandfathered.
Charitable Contributions. The rules for charitable contributions are complicated and the amount of the potential deduction depends on the nature of the gift and the type of charity.
Personal Casualty and Theft losses. To be deductible the total casualty and theft losses must exceed 10% of your AGI. The Act suspends such losses unless they are attributable to a “Federally Declared Disaster.”
Miscellaneous Itemized Deductions. The Act does not allow miscellaneous itemized deductions.
Above the Line Deductions. The Act retains the $250 deduction for school teachers who pay for classroom supplies themselves; student loan interest and the tuition deduction, but eliminates the deduction for moving expenses, except for those in the Armed Forces. It also makes the following permanent change to alimony payments:
Alimony Payments: Effective for divorce Separation Agreements entered into after December 31, 2018, the payor spouse will no longer be able to deduct alimony/maintenance payments to his/her ex-spouse; and said payments will no longer be taxable to the ex-spouse. Existing agreements are not affected by this change unless they are modified and expressly provide that this change applies.
Child Support. Child support payments continue to be non-deductible by the payor and not includible in the recipients’ income.
Income Exclusions.
Sale of Principal Residence. The current law remains unchanged. It allows a single taxpayer to exclude up to $250,000 of gain ($500,00 if married, filing jointly) on the sale of your residence, provided that it was your principal residence for two of the five preceding years.
Tax Credits.
Child Tax Credit. Current law allows taxpayers a $1,000 credit for each “qualifying child” under age 17. For the period 2018 – 2025, the Act increases the credit to $2,000 per qualifying child and increases the level at which the credit starts to phase out ($400,000 for married couples filing jointly; $200,000 for any other taxpayers). It increases the refundable portion to up to $1,400 per child, and permits an additional credit of $500 for dependents other than a qualifying child.
529 Accounts. The Act now allows distributions up to $10,000 per year for a beneficiary’s tuition at “an elementary or secondary public, private or religious school.”
Gift and Estate Tax Exclusion. Under current law, an individual can protect $5.49 million worth of property from gift and estate tax ($10.98 million per married couple). The inflation-indexed amounts were scheduled to rise to $5.6 million (individual) or $11.2 million (married couple). The Act doubles the current $5 million exclusion to $10 million, indexed for inflation. The 2018 inflation adjustment, however is now subject to the less generous “chained CPI” calculation, which will likely produce lower inflation-indexed numbers going forward.
Individual provision generally sunset in 2026. To ensure that the Act “fit” within the allowable $1.5 trillion price tag required to comply with senate budget rules, most of the Act’s individual provisions will end in 2026, and the tax law will revert to where it is now for individuals.
The information provided herein is general in nature and is not an opinion as described in IRA Circular 230 and, therefore, it cannot be relied upon by itself to avoid any tax penalties. The information is general and does not take into account an individual’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. No warranty or representation, express or implied, is made herein, nor does the writer accept any liability with respect to the information and data set forth herein. The information contained herein is not intended to be, and does not constitute, legal, tax, accounting or other professional advice; it is not intended to offer penalty protection nor to promote, market or recommend any transaction or matter addressed herein. The reader is referred to his/her tax or accounting professional for specific tax advice.
