Happy 2018! Last year at this time, the biggest thing to talk about for taxes was a 20-page summary of the PATH act, delays in refunds for taxpayers claiming certain credits and some changes for Arizona employers. Today, I’m beginning to wade my way through more than 700 pages of the conference report on what is being called the “Tax Cuts And Jobs Act.” Before we get too far, unless otherwise noted, none of this applies to filing your 2017 tax return. Wait for the documents you normally get but please make your appointment with your tax professional.
Now, there are a couple of slightly interesting – if only to tax geeks – items. I will just mention these curious items and then hit a couple of notable sections. I will not get to everything. First, “SEC. 11000. (b) AMENDMENT OF 1986 CODE. – Except as otherwise expressly provided…” There have been many modifications to the tax code over the past 30 years but to understand what just passed, we have to dust off our copies of 30-year-old tax code. (For a little bit of historical reference, in 1986, Microsoft was shipping Windows 1.03.) That’s the thing with bills, they don’t really start from scratch, they start from something that exists in most cases. There will be a lot of language stating section such and such is modified in this manner and that oftentimes makes it difficult to read for the layperson. But let us see what just a few provisions might mean.
The Standard Deduction
The standard deduction is an amount that is predetermined by Congress and the IRS as an amount to be subtracted from your AGI. It is normally adjusted for inflation and depends upon your filing status. For 2017, it is $6,350 for a single individual, $12,700 for a married couple, higher for individuals over 65 and/or blind. For 2018, that number temporarily jumps to $12,200 for individuals and $24,400 for a married couple; the elderly and blind additional amounts remain – until tax year 2026, when it goes away.
The personal exemption amount of $4,050 is currently allowed unless you earn over $313,800 for married taxpayers or $261,500 for single taxpayers. Those are gone, wiped out. Until 2026, that is.
Home Mortgage Deductions
If you currently own a home and deduct mortgage interest (even with the new standard deduction of $24,400 MFJ), not much changes for your acquisition debt or your first mortgage. Interest will remain deductible on the first mortgage of up to $1,000,000. Don’t expect to deduct your equity line though, that’s gone through 2026 as well. If you waited to buy a house, the primary home mortgage gets cut back to $750,000 through 2026, although with the current rules that will adjust back to $1,000,000 of acquisition debt in 2026.
Medical expenses are deductible above 7.5 percent of AGI (current law is above 10 percent).
SALT (State and local Taxes)
Total state and local income, sales tax and property tax are limited to $10,000 until 2026.
Unless the President declares a Presidential Disaster area, your losses are your own. It might be time to review your property insurance coverage to make sure it covers fire, floods, tornadoes or snow damage.
Gone are the deductions for investment related expenses, safety deposit boxes and fees paid to attorneys and your tax advisor. Also, if you are a construction worker who travels thousands of miles per year to job sites, buy your own tools, a teacher who attends conferences, or a nurse who attends classes to maintain your certification: no longer deductible. Well, “suspended” through 2025; you can take those expenses again in 2026 if nothing changes. If you normally have a lot of out-of-pocket work related expenses, it might be time to consider whether being self-employed is the better way to go.
If your employer pays part or all of your moving expenses, that is now income to you, unless you are in the military. Oh, and it also means that unless you are military, you don’t get to deduct your moving expenses either.
Up to this point, I have covered items that have been eliminated. One item that has not been is the per child tax credit for children under 17. This actually goes up to $2,000 from $1,000 per qualifying child, with a maximum of $1,400 of that being refundable.
This is just the tip of the tax reform iceberg. There will be much that breaks off and surfaces over the year and I will do my best to interpret them into plain English for our readers. Note that I was unable to touch on business expenses or new pass through rules and rates. I’ll try to break open that chestnut next month. FBN
By Patrick Fleming, EA
Patrick Fleming, EA is a partner at Northern AZ Financial Services Co., northernazfinancial.com. He can be reached at 928-526-3999