An attempt by Congress to end the medical expense deduction caused an intense reaction because it would have affected people in nursing homes and those with costly chronic diseases. In the end, the deduction was retained and made slightly more generous by lawmakers. They lowered the threshold from 10 percent to 7.5 percent of income for tax year 2017 for taking the write-off and made it apply for 2018 as well. Thus, if taxpayers exceed 7.5% of income, they can deduct eligible expenses for 2018. The threshold for all filers rises to 10 percent of the adjusted gross income in 2019. Eligible expenses include many out – of-pocket costs that are not typically covered by health insurance. Among them are the cost of nursing home, insurance premiums paid with post-tax dollars, prostheses, eyeglasses, and even a wig after chemotherapy if needed, among others. This deduction is available only to individual filers.
The tax overhaul also suspended many other deductions or imposed new limits on them while targeting major write-offs such as mortgage interest and state and local taxes. These changes usually expire in late 2025. On Schedule A, a grab bag of items, Congress eliminated deductions for miscellaneous expenses. The change removed deductions for unreimbursed travel, meal and entertainment expenses for employees; union dues; uniforms; subscriptions; fees for safe deposit boxes; and fees for tax preparation; among others.
The deduction for investment-consulting fees is also gone. This change affects investors who pay advice fees based on a percentage of their assets, including many with separately managed accounts that are tax-efficient. It also hits investors in hedge funds or other partnership-structured funds if they owe tax on profits before deducting heavy fees.
Many taxpayers found the deduction of miscellaneous expenses difficult to qualify for, as total eligible expenses had to exceed 2 percent of adjusted gross income. For most casualties and theft losses other than from federally declared disasters, lawmakers also curtailed the deduction on Schedule A.
Some other itemized deductions, such as certain gambling losses, are still permitted. They are listed in the return instructions for Schedule A. Congress ended the deduction by taxpayers who are not in the military for moving expenses. However, even if they don’t itemize, educators can still deduct up to $250 in personal expenses for classroom supplies.
As a result of the overhaul, the number of tax returns claiming deductions for charitable contributions is expected to fall by more than 50%. For 2018, approximately 15 million filers will take this write-off, compared to approximately 36 million for 2017. The standard 2018 deduction is almost double the 2017 level, rising from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for couples filing together. It rises to $12,200 for individuals and $24,400 for couples for 2019. The standard deduction is the amount filers can exclude from income if they do not list “itemized” write-offs for mortgage interest, charitable donations, state taxes and the like on Schedule A. As a result, a filer’s itemized 2018 deductions will have to be higher than new standard deductions for the filer to benefit from itemizing. Say Anna and her husband, John, donate $10,000 annually to charities, but their mortgage is paid off and their only itemized deduction is $10,000 in state and local taxes, for a total of $20,000. This couple set out deductions for tax year 2017 on Schedule A because the total of $20,000 exceeded their standard deduction of $12,700. But they will opt for the standard $24,000 deduction for tax year 2018 as it exceeds the total of $20,000 on Schedule A.
There are ways around this change for charitable donors wanting a tax break. One is every couple of years to “bunch” donations to overcome the higher standard deduction. If Anna and John donate $20,000 each other year, in those years they could itemize and claim the standard deduction in the years they don’t donate. Also, donor-advised funds should be considered by givers. These popular accounts allow donors to bundle smaller gifts into one large amount and take a gift year deduction. Afterwards, the donor may designate charities as recipients. Meanwhile, although the accounts have fees, it is possible to invest the assets and grow tax-free. Donors who are 70 1⁄2 or older, if they have individual retirement accounts, have another good strategy. Many can benefit from contributing directly to one or more charities up to $100,000 of IRA assets.
The overhaul made a significant change to the alimony payments tax status. For divorce and separation agreements signed after 2018, payers will not be able to deduct alimony on their tax returns. At the same time, future recipients will no longer be required to report these payments as income, making their tax treatment similar to that for child support. Deductions for alimony paid as a result of agreements signed in 2018 and earlier will still be permitted, and such payments will still be taxable to recipients. Changes to the alimony of the overhaul will be negative in many cases for both couple members because the payer and the payee are often in very different tax brackets. The resulting payments are likely to shrink to lower-earning spouses. Alimony, also known as maintenance, is usually used when one divorcing couple’s spouse earns much more than the other. Alimony payments continue for years and help to cover the costs of splitting one household into two.
The overhaul almost abolished the alternative minimum tax, or AMT, a complex and unpredictable parallel tax system. The purpose of the AMT is to limit tax breaks that are permitted under the regular tax system and to ensure that high earners can not avoid all taxes legally.
Legislators ultimately retained the AMT, but with significant changes. The changes will expire in late 2025. Far fewer people will owe the revised AMT. ATM will affect approximately 200,000 returns in 2018 compared to 5 million filers in 2017
This levy will also fall on the wealthy less heavily and on very high earners more heavily than in the past. The number of people earning $500,000 or less who owe AMT will drop to about 50,000 in 2018, compared to about 4 million in 2017. Several of the preceding AMT triggers have been reduced or abolished, helping to reduce the number of taxpayers who owe it. These prior triggers include deductions from state and local taxes, personal exemptions and miscellaneous deductions. Furthermore, the exemption from AMT has been extended. The breaks that trigger the revised AMT are likely to be more unusual items like incentive stock options, interest on certain municipal bonds, and net operating losses.
Significant changes were made to the “Kiddie Tax,” a special levy on the “unearned” income of a child above $2,100 in 2018 and $2,200 in 2019. It typically applies to investment income such as dividends, interest, and capital gains, and is not applicable to the earned income of a young person from newspaper delivery or babysitting. Congress passed the Kiddie Tax in 1986 to prevent wealthy or wealthy people from benefiting from lower tax rates for their children by shifting to them income-producing assets. Today, if they are full-time students and are not self-supporting, the Kiddie Tax applies to nearly all children under 18 and many who are under 24. The overhaul revised the Kiddie tax so that the unearned taxable income of a young person is now subject to the rates of trust tax rather than the income tax rate of the parents. This change will expire in late 2025. The change simplifies the tax considerably, but for some, the rate shift is unfavorable. The threshold for the 20 percent rate of capital gains for 2018, for example, is $12,700, compared to more than $400,000 for 2017 under prior law. An inflation adjustment raises it to $12,950 for 2019.
For children of high-income parents, the new Kiddie tax will often be lower or the same, but it could rise in lower tax brackets for parents ‘ children. For example, say a full-time college student has a high-earning grandparent and his parents have roughly $150,000 in taxable income. The grandparent gives the student stock to sell with a long-term gain of $40,000 to help with costs. Under the law, the grandson would have owed a tax of almost $5,700 because the rate of capital gains of his parents was 15%. But under the new law, his sales tax bill rises to almost $6,600, as part of the gain is now taxed at the top rate of 20 %. It would be better for grandparents to give the parents the stock instead of the student and let them sell it, reducing the tax rate to 15%. Changes in the overhaul will often be favorable for top-bracket taxpayer children. If such a child has an interest or payout of $4,000 from an inherited individual retirement account, before the overhaul, the Kiddie tax bill would have been about $860. Due to the lower trust rates, it drops to about $300 for 2018.
At the end of the year, the overhaul doubled the maximum child tax credit from $1,000 to $2,000 for each child in a family under the age of 17. This credit is also eligible for many more families. For 2018, it begins to phase out at $400,000 of adjusted gross income for most couples and $200,000 for most individuals, compared to $110,000 for couples in 2017 and $75,000 for single individuals. Low and moderate earners may be eligible for a credit payment of up to $1,400 per child, even if they do not owe a tax on income. The credit changes expire after 2025.
Credit and income levels are not adjusted for inflation, but the payment to lower earners of up to $1,400 per child is rarely adjusted in the coming years. The expanded credit will be a more valuable benefit for many filers with children under the age of 17 than the personal exemption suspended by the overhaul. A credit is a dollar-for-dollar tax offset, while the personal exemption was a deduction for higher earners from income. For 2017, each household member was $4,050.
Families with 17-year-old dependents, such as college students or an elderly parent, are often less well off after the overhaul. The tax credit for each of these dependents falls to $500, so the personal exemption would have provided more benefits in many cases. The new provisions do not change the existing rules of the tax code that define who is a dependent.
The tax overhaul contains new restrictions, both indirect and direct, on mortgage interest deductions. By the end of 2025, these changes expire. According to IRS, the number of tax returns with a mortgage interest deduction will fall to approximately 14 million in 2018 compared to 32 million in 2017. One reason for the change is that millions more filers will claim the expanded standard deduction separately from the list of write-offs in Schedule A. For example, if the mortgage interest of a married couple, state taxes and charitable contributions average about $18,000 per year, they have benefited from the listing of these deductions in Schedule A before the overhaul. But they won’t for 2018, because instead of taking the $24,000 standard deduction, it’s to their advantage.
Legislators have also made significant changes affecting some taxpayers who take deductions from mortgage interest. The new law allows homeowners with existing mortgages to deduct interest on a total debt of $1 million for the first and second homes. However, for new buyers, the $1 million limit for a first and second home drops to $750,000. These limits for inflation are not indexed. For example, if Joe had a mortgage of $750,000 on his first home and a mortgage of $200,000 on his second home as of December 15, 2017, he can continue to deduct interest on both on Schedule A. But if he purchased a home with a mortgage of $750,000 by that date, and then purchased a second home with a mortgage of $200,000. he couldn’t deduct interest on the second loan in 2018.
Homeowners can refinance mortgage debt of up to $1 million that existed on 15 December 2017 and still deduct interest. But often the new loan can not exceed the refinancing of the mortgage. For example, if Jane has a mortgage of $1 million she paid down to $800,000, she can refinance up to $800,000 in debt and continue to deduct interest. If she refinances $900,000 and uses $100,000 in cash to upgrade the home, she could also deduct interest on $900,000. But if Jane refinances $900,000 and just pocks $100,000 in cash, she could deduct interest on refinancing only $800,000.
Under previous law, homeowners could deduct interest on home equity debt of up to $100,000 used for any purpose. To be deductible, the loan must now be used to “buy, build or significantly improve” a first or second home. The debt must also be secured by the home to which it applies, so that a Heloc can not be used to buy or expand a second home on a first home.
The tax law did not changed the favorable rates for long-term capital gains and many dividends, and there is still a popular zero rate for these types of investment income. For 2018, the zero rate applies to jointly filed married couples who have a taxable income of up to $77,200 ($38,600 for singles). A rate of 15 percent will then apply to joint filers with a taxable income of up to $479,000 ($425,800 for single filers), and a rate of 20 percent will apply above that. For filers with higher incomes, there is also a 3.8 percent surtax on net investment income.
Long-term gains in capital are net profits from investments held over a year. As in previous legislation, short-term capital gains on investments held for one year or less are taxed at the same rates as ordinary income. The favorable dividend rates apply to the “qualified” ones. Unqualified dividends are taxed at rates of ordinary income.
The tax overhaul did not abrogate the net investment income surtax of 3.8 percent. This tax applies to most married couples ‘ adjusted gross income of $250,000 and most single filers ‘ $200,000. Those thresholds for inflation are not indexed. As a result, top-ranking taxpayers usually owe 23.8 percent of their long-term gains and dividends instead of 20 percent. Some investors in the 15 percent bracket for this income owe part or all of it a 3.8 percent surtax because their adjusted gross income exceeds the $250,000 / $200,000 threshold. Filers below the threshold do not owe it. Congress also preserved most municipal bond interest tax exemptions.
For many people, the most significant changes in the tax overhaul are the almost doubling of the standard deduction and the abrogation of the personal exemption. The standard deduction is the amount filers subtract from income if they do not break deductions for mortgage interest, charitable contributions, state and local taxes and other items in Schedule A.
The listing of these deductions is referred to as “itemizing.” The overhaul raised the standard deduction for 2018 to $24,000 per married couple filing together and $12,000 for singles, up from $12,700 for couples and $12,000 for singles. For 2019, $24,400 per couple and $12,200 per single filer will be increased. According to Internal Revenue Service, the number of itemizing taxpayers in 2018 is expected to decline by more than half-from nearly 47 million in 2017 to approximately 18 million out of approximately 150 million tax returns.
The switch to the standard deduction simplifies the return of almost 30 million filers. It will also ease the burden of the IRS, as the agency will have fewer monitoring deductions. However, the change also means that these filers will not benefit specifically from mortgage interest or charitable donations. This could affect future donation decisions or home ownership decisions.