By Michael J. Mariani, Tax Associate | Family, Executive & Entrepreneur Advisory Services Team
Among the notable changes included in the Tax Cuts & Jobs Act, signed into law on December 22, 2017, are increases to the standard deduction, suspension of the personal exemption, and changes to itemized deductions that may be claimed.
Generally, the following changes apply to tax years beginning after December 31, 2017 and before January 1, 2026.
Standard Deduction Increased
The standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. These amounts are nearly double the 2017 standard deduction amounts (i.e., $12,700 for married individuals filing jointly, $9,350 for head-of-household filers, and $6,350 for all other taxpayers).
Personal Exemption Suspended
The personal exemption deduction is temporarily suspended by reducing the amount to zero. For 2017, the personal exemption deduction was $4,050. This exemption amount, however, was subject to a phase-out beginning with adjusted gross incomes of $313,800 for married individuals filing a joint return and $261,500 for single taxpayers, and was completely phased out for $436,300 for married individuals filing a joint return and $384,000 for single taxpayers.
Expansion of Itemized Deductions
Threshold on Medical Expense Deductions Decreased
The threshold on medical expense deductions is reduced from 10% of adjusted gross income (“AGI”) to 7.5% of AGI for all taxpayers for 2017 and 2018. Additionally, the rule limiting the medical expense deduction for alternative minimum tax (“AMT”) purposes to 10% of AGI does not apply to tax years beginning after December 31, 2016, and ending before January 1, 2019. The 10% of AGI threshold returns for 2019 and future years.
Increase in Charitable Contribution Deductions
The 50% of AGI limitation for cash contributions to public charities and certain private foundations is now increased to 60% of AGI. Moreover, contributions exceeding the new 60% limitation are generally allowed to be carried forward and deducted for up to five years.
Suspension of Phase-Out of Itemized Deductions
The phase-out of itemized deductions (i.e., “Pease” limitation) is temporarily suspended.
Limitations on Itemized Deductions
Limitations on State and Local Tax Deduction
Taxpayers are limited to claiming a state and local tax deduction of up to $10,000 ($5,000 for married taxpayers filing separately) for the aggregate of: (i) state and local property taxes (i.e., those reported on Schedule A, not on Schedule C or as part of a business) and (ii) state and local income or sales taxes paid or accrued in the tax year.
For taxpayers subject to the AMT, some or all of the benefit of the state and local tax deduction may have been eliminated in previous years, so the limitation on the deduction in 2018 may not have a material impact on their tax liability.
Limitations on Mortgage and Home Equity Indebtedness Deductions
The deduction for home equity indebtedness is temporarily suspended, and the deduction for home mortgage interest is limited to underlying indebtedness of up to $750,000/$375,000 for married taxpayers filing separately. However, for tax years beginning after December 31, 2025, the $1,000,000/$500,000 limitations under prior law are restored, and taxpayers may claim acquisition indebtedness up to these amounts regardless of when the indebtedness was incurred.
Note that the new lower limit does not apply to any acquisition indebtedness incurred before December 15, 2017. Specifically, a taxpayer who enters into a written contract before December 15, 2017, to close on a principal residence before April 1, 2018, is considered to have incurred acquisition indebtedness prior to December 15, 2017. Moreover, the $1,000,000/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before December 15, 2017, so long as the principal balance of the new loan does not exceed the principal balance of the old loan at the time of refinancing.
It is also worth noting that the suspension of the interest deduction on home equity indebtedness only applies to home equity loans not used for the purchase or renovation of your home. Home equity used for these purposes is classified as acquisition indebtedness and follows the limits stated above. Examples of non-deductible home equity indebtedness include paying off credit card debt, paying off student loans, or buying a new car.
Limitations on Charitable Contribution Deductions
Although the limitation on the number of charitable deductions a taxpayer may claim has increased, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. This is a change from the law that allowed a deduction of 80% of such payment as a charitable contribution in tax years through 2017.
Suspension of Miscellaneous Itemized Deductions Subject to 2% Floor
The deduction for miscellaneous itemized deductions subject to the 2%-of-AGI floor is temporarily suspended. Example of miscellaneous itemized deductions subject to the 2% floor include: investment expenses, appraisal fees (for charitable donations or casualty losses), indirect miscellaneous deductions of pass-through entities, safe deposit box fees, tax preparation fees, trust administration fees, union dues, and unreimbursed business expenses.
For taxpayers subject to the AMT, a portion of this deduction may have been eliminated in previous years, so the suspension of this deduction in 2018 may not have a material impact on their tax liability.
Putting the Pieces Together–Planning for 2018
So how do all of these changes impact you? Below are several key points to consider in the year ahead:
- Virginia residents should experience a limited impact from the limitation of the state and local tax deduction as the increase in tax liability will generally be offset by the overall decrease in federal tax rates and the suspension of the phase-out of itemized deductions.
- Taxpayers who are limited in claiming the state and local tax deduction may consider making charitable contributions to certain charities that provide state income tax credits. Doing so will effectively shift your state income tax deduction to a charitable contribution deduction. For additional information on this topic, see the Keiter blog article on Neighborhood Assistance Program Credits.
- Taxpayers who no longer have a mortgage on their home may find that they qualify for the standard deduction but for their charitable contributions. Such taxpayers should consider “bunching” their charitable contributions in certain years and claiming the standard deduction in other years. Establishing a Donor Advised Fund will help you to effectively “bunch” your charitable contributions while still providing cash flow to charities on a regular giving basis. For a more detailed analysis, see the Keiter blog article on Charitable Contributions.
- As noted above, the charitable contribution deduction was impacted both positively and negatively. Read more on Charitable Contributions for a detailed analysis of the changes.
- Taxpayers who regularly deducted unreimbursed business expenses as miscellaneous 2% itemized deductions should work with their employer to be reimbursed directly for such expenses as they will no longer provide any tax benefit.
Please contact your Keiter advisor to discuss how these changes may affect you and possible planning opportunities for 2018. Email | Phone: 804.747.0000.
- Business Expense Changes: Reduced Meals and Entertainment Deductions
- Tax Cuts and Jobs Act: What you need to know about the Estate, Gift & Trust Provisions
- 2017 Tax Cuts and Jobs Act: What Does It Mean for Families With Children?
- AMT Changes to Individuals and Businesses
- Excise Tax Changes Impact Tax Exempt Organizations
- Understanding the New Section 199A Pass-through Deduction
- Tax Cuts and Jobs Act Resource Guide
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.