Still getting your arms around the new tax law? Don’t worry, we’re here to help! In last week’s blog, I reviewed a few of the broad changes taking effect and the positive impact those may have on your tax situation in 2018. This week, we’re going to delve into some changing or disappearing deductions, of which there are many. To keep things simple, however, I’m choosing to highlight some of the deductions most likely to affect the average American, so again, this is not an exhaustive list. After all, the best way to eat an elephant is one bite at a time, right?
Personal Exemptions Suspended
In 2016 and 2017, taxpayers could reduce their taxable income by $4,050 per person. Under the Tax Cuts and Jobs Act, the personal exemption – until Jan. 1, 2026 – is effectively suspended, because lawmakers reduced the statutory exemption amount to zero. According to some policymakers, the personal deduction became a part of the larger standard deduction offered under the new law, but the change may not be enough to offset the loss of the personal exemption by some taxpayers.
Kiddie Tax Modified
The so-called Kiddie Tax applies to a child’s investment income. (The Kiddie Tax applies to investment income of children under the age of 19, or 24 for full-time students.) For 2017, any interest, dividends or other unearned income in excess of $2,100 may be taxed at the parents’ tax rate. However, under the new tax law, that same unearned income will be taxed instead according to the brackets that apply to trusts and estates.
Casualty and Theft Loss Deduction Suspended
For tax year 2017, the IRS allows you to deduct casualty and theft losses not covered by insurance, provided those losses exceeded $100 plus 10 percent of your adjusted gross income (AGI). (This includes robberies, fire and other qualifying events.) Under the new law – until Jan. 1, 2026 – the personal casualty and theft loss deduction is suspended, except in situations where the personal casualty occurred in a federally declared disaster area.
Tax Prep Fee Deduction Eliminated
Before tax reform, the IRS allowed taxpayers to deduct either the money they spent on tax prep software, or the cost of having a professional prepare their taxes. This was considered a miscellaneous deduction. Unfortunately, this deduction has been eliminated.
Investment Advice Deduction Eliminated
Until now, taxpayers could take an itemized deduction for investment advice that costs more than two percent of their AGI. Under the new law, clients of investment advisers can no longer itemize and deduct those fees.
Deductions Related to Your Job
Moving Expense Deduction Eliminated
Under IRS Code Sec. 217, taxpayers were allowed an above-the-line deduction for moving expenses they incurred for the tax year in which they began a new job or became self-employed. If you moved in 2017 for a new position, and you meet the conditions related to your new workplace’s location and your time as an employee, you can still take this deduction on your 2017 taxes. However, beginning in 2018, the Tax Cuts and Jobs Act temporarily suspends the moving expense deduction (until Jan. 1, 2026), except for active-duty military personnel whose orders require moving. The orders must be incidental to a permanent change of station.
Job Expenses Deduction Eliminated
Do you pay out of pocket for items related to your job, like licenses, required medical tests, regulatory fees or unreimbursed continuing education? Until now, certain job costs like these could be deducted as long as they and other miscellaneous deductions exceeded two percent of AGI. Under the new law, these deductions go away.
Bicycle Commuting Deduction Eliminated
Until now, the tax code allowed a deduction of $20 per month for expenses related to commuting to work by bike (if you weren’t already enrolled in a commuter benefit program through your employer). This deduction has been eliminated under the new law. Regarding those commuter benefits, employers can no longer deduct the subsidies of up to $255 per month that they may have provided to workers for parking or transit passes, so we may see some companies eliminate that benefit as well.
Classroom Supplies Still Deductible
The Tax Cuts and Jobs Act kept one bit of good news for teachers, who often spend their own money on supplies they use in the classroom. Under the new law, teachers can continue to deduct up to $250 of their costs for classroom materials.
Deductions Related to Your Home
Mortgage Interest Deduction Lowered
Prior to this year, homeowners could deduct up to $1 million ($500,000 for married people filing separately) of their mortgage interest, and this still applies to homeowners who purchased before 2018. Those who purchase homes now may only deduct the first $750,000 of mortgage debt.
Home-Equity Loan Interest Deduction Suspended
From now until Jan. 1, 2026, taxpayers with home-equity loans may not claim a deduction for interest on their home-equity indebtedness. And, unlike mortgage interest, there’s no grandfathering provision, either.
Capital Gain Exclusion Stays the Same
Under the old tax code, capital gains (the difference between the price you paid for your home and the price you sold it for) were treated as taxable income, but if you lived in your home for two out of the past five years, you could exclude up to $500,000 as income to avoid paying federal taxes on it. (The amount is $250,000 for married taxpayers filing separately.) Congress did not change this rule as part of the Tax Cuts and Jobs Act.
SALT Deductions Limited
Depending on where you live, the new cap of $10,000 on SALT (state and local tax) deductions may mean that you’ll be less likely to itemize on your 2018 taxes. (Those in high-tax states are most likely to be affected.) If you are a single person, however, it may be a bit easier to itemize. For example, if your SALT taxes are $10,000 and you have charitable contributions of $4,000, you would exceed the $12,000 standard deduction for single filers and could itemize. Things get tougher for married couples who must exceed the $24,000 standard deduction.
Deductions Related to Education
Student Loan Reductions Remain the Same
Good news for those paying off student loans. You can still deduct up to $2,500 per year for student loan interest.
Tuition Waivers Also Remain Tax Free
Graduate students who receive tuition waivers for serving as teaching or research assistants will not have to pay income taxes on those waivers under the new tax law.
529 Plan Uses Get Broader
Although people who invested in 529 savings plans weren’t taxed before, the scope of how they can use the money in their plans changes under the new law. In the past, the money in a 529 plan could only be used for college expenses. Under the Tax Cuts and Jobs Act, a 529 plan owner can take up to $10,000 annually to pay for sending a child to a public, private or religious elementary or secondary school.
To get a more complete overview of this comprehensive new law, I invite you to join me for AMDG Financial’s “Making Sense of Tax Reform” webinar, Wednesday, Feb. 28 from 3 to 4 p.m. EST. We’ll also talk about some things to consider as you make major purchases, contribute to charity, plan for education spending, and more this year. While each person’s tax situation is different, our goal is to get you thinking about tax planning as an integral part of your holistic financial plan. In the meantime, if we can be of assistance, please feel free to contact us anytime. We look forward to talking with you!