With the new tax law comes many changes that will impact individuals in 2018 and beyond. The following is far from a comprehensive list of changes. But as we head into the end of the year and the first filing season under the new laws, the following list will help to identify some changes that you may need to look further into and consult your tax adviser on:
- Standard Deduction: The standard deduction is almost doubled starting in 2018, with increases to $24,000 for married filing jointly and $12,000 for single filers. Many individuals with modest mortgages who previously itemized their deductions may no longer itemize their deductions as a result of the increase. This will have a lot of implications for many families and individuals. In certain cases, it makes home ownership less desirable due to a lack of tax advantages. If you have a $200,000 mortgage, you may have previously exceeded the standard deduction due to the mortgage interest expense deduction. But with the increase in the standard deduction, that same taxpayer may now utilize the standard deduction regardless of whether they have mortgage interest or not. It also makes bunching deductions a more important strategy for many taxpayers. Bunching deductions could refer to making your charitable contributions that you would typically make over the span of years in one single tax year. This could potentially push the taxpayer into itemizing deductions for the year that they bunched their deductions, whereas they may just use the standard deduction in both years had they not bunched their deductions.
- Alimony: For any divorce agreements after 2018, alimony will now be nondeductible to the payer and nontaxable to the recipient. This could have significant impacts for negotiations during divorces or separations, and both parties should factor in these tax ramifications during negotiations.
- Moving Expenses: Previously, there was a deduction for moving expenses if certain criteria were met. The new tax law eliminates deductions for moving expenses, except for active duty military in certain circumstances. This isn’t going to impact anyone’s decision to move or not, but you may want to be more cost-effective with moving expenses now that there is no tax deduction.
- Medical Expenses: The floor for deducting medical expenses will be lowered back to 7½ percent for 2018 from 10 percent. If there is a change you will approach that floor, be sure to keep track of all your expenses and keep your receipts. And make sure to review a list of all expenses that qualify for the deduction. There are plenty of expenses outside of just payments to doctors that can qualify for the deduction, such as transportation costs to doctor visits and dental care.
- Limitation of Property Tax and State Tax Deduction: The deduction for personal taxes will be limited to $10,000 beginning in 2018 for married filing jointly. This will have some similar implications as the items discussed in #1 above. This will decrease deductions for many taxpayers and may result in those taxpayers simply utilizing the standard deduction instead of itemizing deductions. With the various changes related to the standard and itemized deduction, there could be a decrease in the complexity of tax preparation for many taxpayers. If a taxpayer does not have to itemize their deductions and go through the related calculations, the burden for preparing and calculating their taxes will be significantly reduced.
- Casualty & Theft: The deduction is eliminated unless the loss is in a disaster area, so if that is not the case then there is no need to track expenses or save receipts for tax purposes.
- Personal Exemptions: Personal exemptions are eliminated beginning in 2018. There is an increased child tax credit, but depending on your specific situation, you may either benefit or be hurt by these specific changes.
- Obamacare Individual Mandate: This is eliminated beginning in 2019. This would only impact those considering going without health insurance, but it will reduce some complexity in tax reporting for those who were either without insurance during part of the year or qualified for credits related to health insurance coverage.
Please consult a tax adviser with any questions!