The DHG National Tax Desk has compiled a list of the tax reform changes most likely to affect you.
Standard Deduction vs. Itemized Deduction
The standard deduction available to individual taxpayers is significantly increased for the 2018 tax year to almost double the current amounts. Single filers’ standard deduction increases from $6,350 to $12,000; head-of-households’ standard deduction increases from $9,350 to $18,000; and, married filing jointly (MFJ) and surviving spouses increases from $12,700 to $24,000. In addition, new limitations imposed on common itemized deductions – such as, mortgage interest, property taxes, state and local taxes and miscellaneous itemized deductions – may decrease the benefit of itemized deductions for many individuals. As a result it may be more beneficial for taxpayers to claim the standard deduction on their 2018 tax returns rather than claiming itemized deductions.
In part due to the increase in the standard deduction and the child tax credit, no deduction is allowed for personal exemptions after 2017.
Itemized Deductions: Miscellaneous Deductions
All miscellaneous itemized deductions that are subject to the 2% floor are no longer deductible after 2017. This includes investment fees, safe deposit box rentals, unreimbursed business expenses of an employee, and tax preparation fees.
Itemized Deductions: Mortgage Interest
Individuals may see a change in the amount of mortgage interest payments they can deduct on their tax returns after 2017. Taxpayers can continue to deduct interest payments made on mortgage indebtedness for their primary residence and up to one other residence – but, only to the extent that the total mortgage indebtedness does not exceed $750,000 ($375,000 for single or married filing separately filers). However, interest paid on any mortgage acquired on or prior to December 15, 2017 will remain deducible under the current $1,000,000 mortgage limitation ($500,000 if single or married filing separately). Additionally, starting in 2018, taxpayers will no longer be allowed to deduct interest payments made on home equity loans.
Itemized Deductions: State and Local Taxes (SALT)
Starting in 2018, itemized deductions for property taxes and state and local income taxes of individuals are limited to a combined total of $10,000.
Note: Property taxes attributable to a trade or business or for property held for the production of income are not subject to this limitation and continue to be deductible as an expense related to the income from that activity rather than as an itemized deduction.
This new $10,000 limit does not apply to the 2017 tax year. In order to maximize the benefit of these deductions while they are still available, it may be beneficial to make any fourth quarter state estimated tax payments by December 31, 2017, to deduct them in 2017 before the limit applies.
Additionally, if you were planning to make your state estimated payments based on a safe harbor calculation, consider whether your actual 2017 state income tax liability is greater than the amount calculated under the safe harbor. If so, increase your fourth quarter state estimated payment to include this additional amount and pay by December 31, 2017, to maximize the deduction. If you normally do not make estimated state tax payments but are anticipating a balance due with your state return in April, consider supplementing amounts paid through withholding by making a fourth quarter estimate to pay the anticipated balance due by December 31, 2017. Similarly, to maximize your deduction consider paying real estate and other property taxes on non-business property by December 31, 2017.
Warning: Language in the final bill specifically prohibits any deductions for early payments made in 2017 to pre-pay your 2018 state tax liability. This rule also prevents you from making a 2017 fourth quarter estimated payment that is larger than the amount needed to cover your projected 2017 liability, i.e. creating a 2017 overpayment to credit against your 2018 first quarter estimated tax obligation.
In planning ahead for your tax year ending December 31, 2018, remember that your deduction for property taxes and state and local income taxes on Schedule A will be limited to $10,000.
Itemized Deductions: Deductibility of Contribution Rights to Acquire Sports Tickets
Starting in 2018, contributions paid to universities for the right to purchase athletic tickets or seating at an athletic event are no longer deductible. Currently 80% of these payments are deductible. If the university allows, taxpayer’s may go ahead and make their contributions in 2017 for rights to purchase tickets for 2018 sporting events and deduct these amounts on the 2017 tax return, subject to the current 80% limits.
Child Tax Credit
For tax years beginning after December 31, 2017 and before January 1, 2026, the child tax credit is increased from $1,000 to $2,000 per qualifying child. The income level at which the credit phases out is increased to $400,000 for MFJ taxpayers ($200,000 for all other taxpayers) (not indexed for inflation). In addition, a $500 nonrefundable credit is available in 2018 for certain non-child dependents.
The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation. No credit will be allowed to a taxpayer claiming a credit for a qualifying child unless the taxpayer provides the child’s Social Security Number.
Alternative Minimum Tax (AMT)
The individual alternative minimum tax computation was changed by increasing the AMT exemption amounts and the phase out thresholds. The AMT exemption amount for 2018 for MFJ taxpayers is increased from $86,200 to $109,400 and the phase out threshold is increased from $164,100 to $1,000,000. The exemption amount for single taxpayers increased from $55,400 to $70,300 and the phase out threshold increased from $123,500 to $500,000.
Repeal of 50% Deduction for Entertainment Expenses
The deduction was repealed for entertainment, amusement and recreational expenses directly related to the active conduct of the taxpayer’s trade or business (and the related rule applying a 50% limit to such deduction) for amounts paid or incurred after December 31, 2017. Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating a trade or business (e.g. meals consumed by employees on work travel).
The new legislation eliminates the exclusion from gross income and wages the amount of qualified moving expenses that were reimbursed by an employer. In addition, the above-the-line deduction for qualified moving expenses is also eliminated.
Tax on Investment Income
The tax rates for capital gains and dividends were unchanged. The net investment income tax is also unchanged.
Deductible Alimony Payments
Under current law, alimony payments are deductible as an above the line deduction. Alimony payments are no longer deductible for divorce agreements executed after December 31, 2018, or which are amended specifically to address the change in taxability. Alimony payments under existing agreements will continue to be deductible beyond 2017. However, alimony payments for agreements executed after December 31, 2018 will not be tax deductible.
Income Tax Rate Tables
The income tax rates and the income levels applicable to each rate have changed, for the most part, such that most income levels are subject to lower tax rates. The tables below summarize the current tax rates for 2017 and the proposed tax rates for 2018.