Recently, the Republican Party passed a new tax reform bill that has left many taxpayers uncertain about how their future tax filings will be impacted. Will you be saving money in taxes? Or will you find yourself paying more? While the answer to those questions will vary depending on your exact situation, it may help to know some of the main points of the tax reform bill so that you can get an idea of how the different changes might impact you.
But first, please note that these changes to the tax law do not apply to your 2017 tax returns. They will be put into effect for the current tax year, so you will not see the effects of the changes until you file next year. If you have specific questions about your tax return and how these changes might affect you, please feel free to schedule an appointment with one of our CPAs in Provo.
Changes to Standard Deductions
For those who choose to claim a standard deduction on their tax returns, the expected deduction amounts for 2018 would have been as follows, under the old tax law: $6,500 for individual filers (including married individuals filing separately), $9,550 for head-of-household filers, and $13,000 for married couples filing jointly.
However, under the new tax law, the deductions for 2018 will be as follows: $24,000 for married couples filing jointly, $18,000 for head-of-household filers, and $12,000 for all other tax payers. These new amounts will apply to tax years 2018 through 2025, with annual adjustments for inflation.
Personal Exemptions Suspended
In the past, you have likely calculated your taxable income by subtracting personal exemption deductions from your adjusted gross income (AGI). Taxpayers could claim exemptions for themselves, their spouse, and any dependents, with the ability to exempt up to $4,150 per individual on the return.
Beginning with the 2018 tax year, however, the approved amount for personal exemptions has been reduced to zero, effectively suspending taxpayers’ ability to claim any personal exemptions.
Cap on State and Local Tax Deductions
Under the old tax law, taxpayers could deduct all state, personal, real estate, and sales taxes on their federal returns. There was no cap or limitation to the amount that could be claimed.
On your 2018 return, you will only be able to claim up to $10,000 in deductions for state and local taxes.
Reduced Mortgage and Home Equity Interest Deductions
For taxpayers who own a home, mortgage and home equity interest is a common tax deduction. This deduction is only applicable for primary residences and qualifying secondary residences. Previously, homeowners could deduct interest on mortgages of up to $1 million (or $500,000 for married individuals filing separately), as well as deducting interest on home equity loans of up to $100,000.
From 2018 through 2025, homeowners will no longer be able to claim deductions on home equity loan interest at all. Deductions for mortgage interest may only be claimed for up to $750,000 in mortgage debt (or $375,000 for married individuals filing separately). If you purchased your home prior to December 15, 2017, the reduced limits do not apply. After 2025, the limitations will revert to the pre-Act rates.
Lower Medical Expense Deduction Threshold
In prior tax years, if you accrued medical expenses totaling more than 10% of your AGI, you were able to claim those expenses as a deduction. That threshold is lowered to 7.5% of AGI if the taxpayer or their spouse is 65 or older.
Under the new tax reform laws, the threshold for medical expense deductions has been lowered to 7.5% of AGI for all taxpayers. As always, this threshold only applies to expenses that have not been reimbursed by your insurance.
Suspension of Miscellaneous Itemized Deductions
Previously, taxpayers could claim miscellaneous itemized deductions on their tax returns if those deductions totaled more than 2% of their AGI.
As of 2018, and through 2025, miscellaneous itemized deductions will no longer be permitted.
Of course, there’s a lot more to the tax law, but these are the main points that will affect the most people in the future. If you’re unsure about how these laws will impact your future returns, please speak to one of our CPAs in Provo.