By: Bruce Ruotsala, CPA, Senior Staff Accountant
The Tax Cuts and Jobs Act (TCJA) is the first meaningful tax reform legislation in decades. It had become standard practice to expect the tax structure to essentially remain unchanged from year to year, with only minor changes along the margins. It will take a little work to understand how the tax system has structurally changed. The most striking difference for most individual taxpayers is whether or not to itemize; don’t expect that this will be the same decision as last year.
Standard deduction vs itemized: Many people will be converting to the standard deduction for 2018. The standard deduction has increased to $12,000 for single taxpayers and $24,000 for Married Filing Jointly (MFJ) taxpayers. Many taxpayers will find themselves using the standard deduction due both to the increase and a limitation of itemized deductions as follows:
- Medical expenses threshold has been reduced to 7.5% for 2018, but not 2019.
- State and local income or property tax deduction is limited to $10,000.
- Mortgage interest on the first $750,000 of home acquisition debt is deductible. Home equity interest is only deductible in limited circumstances.
- Charitable donations are deductible up to 60% of AGI.
- Casualty losses may only be deducted on federally declared disasters
- Miscellaneous itemized deductions have been eliminated; i.e. unreimbursed employee expenses, union dues, tax prep fees and investment expenses
- There is no limit on total itemized deductions
These changes will push many taxpayers to the standard deduction rather than the itemized deduction for 2018. If you know that you will be using the standard deduction, save the effort of gathering all documentation and let your tax accountant know. As always, if Schedule A information is provided, Melanson Heath will optimize and use whichever method is most beneficial.
Example: In 2017 and 2018, a MFJ taxpayer had an AGI of $100,000, property taxes of $12,000, home mortgage interest of $6,000, home equity interest of $2,500, and investment expenses of $3,000. The taxpayer would itemize in 2017, with a total deduction of $21,500 ($12,000+$6,000+$2,500+($3,000-$2,000). For 2018, the taxpayer’s itemized deductions would be $16,000 ($10,000+$6,000). Therefore, it is more beneficial to use the $24,000 standard deduction in 2018. It is important to note that although the increased standard deduction may appear to be beneficial, there is the elimination of the exemptions, so everyone’s individual tax situation will change in a unique way, making tax planning that much more important this year.
In addition to the Schedule A, there were a number of other noteworthy changes to the tax code, they are as follows:
- Alimony payments are neither deductible nor taxable for divorces made final after December 31, 2018
- Child tax credit increases from $1,000 to $2,000, with $1,400 refundable. The phase out limits for taking the credit increased significantly
- Passthrough income deduction of 20% (not covered in detail here)
As always, Melanson Heath is here to help you navigate the ever-changing tax code. Every situation is different and we stand ready to offer a “tailored” approach to your tax situation.