When the clock struck midnight at the dawn of 2018, far more had changed than just the date. While you were ringing in the New Year, the world of taxes we all know and love was swept aside by the most monumental transformation of the tax law in over 30 years.
Fortunately for you, I’ve taken it upon myself to dive into the belly of this new tax beast and distill its 503 pages of yawn-inducing text into something a little simpler. I’ll be breaking this blog post into two parts. This one focuses on the changes for individual taxpayers. Next week, I’ll target the new rules that apply to businesses.
1. The tax brackets have changed
There are still seven brackets, but their rates have changed.
2. Personal exemptions have been eliminated
Previously, you could deduct $4,050 from your income for yourself and each dependent you claimed. No more.
3. The standard deductions have nearly doubled
4. Mortgage deduction limits have been lowered
Bad news for those of you buying million dollar homes this year. Previously, you could deduct interest payments on mortgage debt of up to $1.1 million, including up to $100,000 of home equity debt. Starting in 2018, the deductible amount for new debts drops to $750,000. Interest on home equity debt can no longer be deducted at all. The amounts don’t change for current mortgage holders.
5. Medical expense deduction limit has been lowered
Under the old guidelines, taxpayers could deduct medical expenses that were greater than 10% of their adjusted gross income. That number has now been reduced to 7.5% of adjusted gross income.
6. State and Local Taxes (SALT) now have a cap
The days of unlimited deductions on state and local taxes are over. The new act caps the SALT deduction at $10,000. This includes state income tax or sales taxes.
7. Charitable contribution deductions have increased, with one caveat
Charitable contribution deductions were increased from 50% of adjusted gross income to 60%. However, the new guidelines prohibit charitable deductions for payments made in exchange for college athletic event seating rights.
8. Personal casualty & theft losses generally won't be allowed
Previously, casualty and theft losses were deductible if each loss exceeded $100 and the sum of all losses for the year exceeded 10% of adjusted gross income. Personal casualty losses have now been eliminated, except for those attributable to a disaster declared by the President himself.
9. Tier 2 deductions are no more
Tier 2 deductions include things like employee business expenses, tax preparation fees and investment expenses. The new act eliminates all these deductions.
10. Moving expenses will only be deductible for military members.
Moving expenses were previously deductible if the new workplace was at least 50 miles farther from the home than the old workplace. Under the new act they are no longer deductible, with some exceptions for the military.
11. The child tax credit has doubled
The child tax credit has gone from $1,000 to $2,000 for each child under 17 years old. Bonus: the first $1,400 is refundable, which means this credit could reduce your tax liability below zero and you can still receive a tax refund.
12. There’s a new credit for non-child dependents
New in 2018 – you can now receive a $500 credit for non-child dependents such as elderly parents, children over age 17, or adult children with a disability.
13. Education savings plans have been expanded
Money invested in 529 Plans used to only be used for college expenses. Now you can use it to cover up to $10,000 per year of K-12 expenses.
14. Roth conversion recharacterizations are no longer allowed
I’ll get into the different types of IRAs in a future post. For now, just be aware that IRA contributions can no longer be recharacterized as a contribution from one type to another. For example, a contribution used to establish a Roth IRA can no longer be recharacterized as a contribution to a traditional IRA.
15. Estate tax exemptions have been increased
Good news if you’ll be inheriting millions of dollars soon. The new law doubles the amount of money exempt from estate taxes.
16. The health insurance mandate will be eliminated, but not yet
The individual mandate, which penalizes people who do not have health insurance, is still in place for now. However, it will be eliminated in 2019.
None of this will affect your 2017 taxes. The new rules don’t go into effect until 2018 so you have a whole year to understand and plan for the new rules. One last thing, these changes are considered temporary for 5 years at which point they may revert back to the previous rules.
Stay tuned for a future post on how the new tax laws will affect businesses. Be sure to follow me on social media for more updates!