The Tax Cuts and Jobs Act, often referred to as Tax Reform, created a large number of significant changes to the tax code. Some changes caused a substantial tax reduction while others caused an increase. For the significant majority of U.S. taxpayers, the net affect will be a tax decrease but certain taxpayers may see an increase from the scale back and elimination of major deductions. The bullets below list many of the major deductions eliminated or scaled back:
- Personal Exemption – As a result of the Tax Reform, the personal exemption has been reduced to $0 until 1/1/26. To offset this reduction, the standard deduction has been increased to $24k for taxpayers filing joint and $12k for single taxpayers. For taxpayers with large families and high itemized deductions this could result in a decreased deduction.
- State and Local Tax Deduction – Starting in 2018, the deduction for State and Local Taxes, which includes state income taxes and real estate taxes, is capped at $10K. Depending on your income level and state and local tax rates, this change could have a significant effect on your federal tax liability.
- Mortgage Interest Deduction – The deduction for mortgage interest has been scaled back. Starting in 2018, individuals can deduct interest on $750K of mortgage debt, down from $1M under the old law.
- Miscellaneous Itemized Deductions – Deductions such as unreimbursed business expenses, investment fees, wagering losses, tax prep fees, safe deposit boxes, casualty losses, among other deductions subject to 2-percent floor are no longer allowed on Schedule A.
- Moving Expenses – Under the old tax rules, a taxpayer could deduct moving expenses when moving to a job at least 50 miles away. For 2018 and after, this deduction has been eliminated.
- Alimony Income Deductions/Inclusions – Effective for divorce or separation agreements entered after 12/31/2018, the deduction for alimony payments and inclusion of income by the receiving party has been eliminated.
- Casualty Losses – The previous tax law provided a deduction to taxpayers sustaining major losses from natural disasters, theft or certain other causes. The amount of unreimbursed loss over 10% of adjusted gross income was deductible. This deduction is now only allowed for properties in a federally-declared disaster zone.
For taxpayers planning their 2018 tax liability, it is important to be aware of the above changes. Over the course of 2018 to date, we have projected the tax liability for many clients. The majority will see significant tax savings but some may see an increase. Planning ahead for your 2018 income tax will allow opportunities to utilize the beneficial areas of tax reform and avoid surprises at tax time.
If you would like to discuss tax planning or any other areas of Tax Reform please feel free to reach out.