The Tax Cuts and Jobs Act was signed by President Trump on December 22. The Act makes sweeping changes to the U.S. tax code and impacts virtually every taxpayer. As more guidance becomes available, we will keep you updated. Here are some of the most consequential changes in brief:
Standard Deduction
The standard deductions beginning in 2018 will be $12,000 for single filers and $24,000 for married couples filing a joint return. The increase in the standard deduction will eliminate the need to itemize for a large number of taxpayers.
Personal Exemptions
In the past taxpayers were allowed an exemption amount ($4,050 in 2017) for themselves, their spouse and their dependents. There will no longer be a deduction for personal exemptions after 2017. The loss of the exemption has been offset by the higher standard deduction discussed above and an increased child tax credit.
Child Tax Credit
The child tax credit is increased to $2,000 per child under the age of 17 beginning in 2018. In previous years that credit began to be phased-out (reduced) when income reached $110,000 for married taxpayers. Under the new law that phase-out will not begin until $400,000 for married taxpayers. This means substantially more taxpayers will be eligible for this credit. In addition, a $500 non-refundable credit will be available for certain other dependents.
Elimination/Modification of Certain Itemized Deductions
Several itemized deductions have been modified or eliminated. The new law allows a deduction for state/local taxes and real estate taxes up to $10,000 combined. In the past there was no limitation on the dollar amount of these deductions.
Interest on mortgages secured by your first and/or second home is deductible on up to $750,000 of principal. There are several quirky rules for mortgages that existed before the new law was passed. If you have concerns regarding this please contact us as each situation is unique.
Another big change relates to interest on home equity loans. Interest on loans not used to buy, build or improve your property is not deductible. There are no rules allowing these loans to be grandfathered in. So, for example, if you took out a home equity loan to pay for a new car, pay off credit cards or send your child to college that interest will not be deductible beginning in 2018.
The interest rules are very complicated, so please contact us with questions.
All miscellaneous itemized deductions subject to the 2% of adjusted gross income have been eliminated. These include employee business expenses, tax preparation fees, and investment management fees, among others.
These are just highlights of the changes and impact of the Tax Cuts and Jobs Act. There is much more to discuss than can be covered in this letter. Please call our office for guidance on any questions you might have.
