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How Tax Reform Will Impact Deductions & Credits-Individuals

Congress passed tax reform in the week before Christmas of 2017. This was the most sweeping tax law change since the recodification of the tax code in 1986. While it will take some time to determine the finer points of this tax reform plan, we have the nuts and bolts in place to determine what the impact will be for most of our clients.

The act increased the standard deduction for married individuals to $24,000 and to $12,000 for single tax payers. What does this mean for you as a taxpayer? It means that your deductions for things such as state income tax, property tax, mortgage interest, and charitable contributions will have to be higher than $24,000 (married) or $12,000 (single) combined in order to make a difference on your tax return. For the sake of comparison, the standard deduction is $6,350 for single taxpayers and $12,700 for married taxpayers in 2017. That is quite an increase, but the increase in standard deductions is offset by the fact that all exemptions are eliminated.

In addition to the change in standard deductions and exemptions, the new law also makes changes to tax deductions already on the books. The following changes have been made to itemized deductions and credits:

-Medical Expenses-In prior tax years, taxpayers could deduct medical expenses to the extent that those expenses exceeded 10% of the taxpayers Adjusted Gross Income (AGI). That threshhold has been lowered to 7.5% of AGI. Verdict: Favorable towards taxpayers

-State & Local Taxes-In prior tax years, taxpayers could deduct amounts paid for state income tax, real property tax, personal property tax (auto), and miscellaneous other taxes. Early proposals of the tax reform eliminated this deduction in its entirety. Representatives from high tax states such as New Jersey, New York, and California really put up a good fight until a compromise was made. The final bill allows taxpayers to deduct the same tax as in prior years, but the deduction is capped at $10,000. Verdict: Unfavorable and neutral...depending on your circumstance. If you are a taxpayer who has not been subject to Alternative Minimum Tax (AMT) in the past, this change could increase your taxable income. However, if you have been subject to AMT in the past and are likely to remain subject to AMT under old laws in future years, this change won't affect you because state and local taxes deducted to calculate your regular income tax liability are added back in order to calculate your AMT. If you want to know whether you were subject to AMT in 2016, look at line 45 on page 2 of your 2016 Form 1040. If there is an amount on this line, you were subject to AMT and won't be affected by this change in law, assuming no major changes to your tax situation in 2017.

-Mortgage Interest Deduction-In years past, you could deduct interest on home debt used to acquire a home. The debt allowed was capped at $1,000,000. The loans that were already in place prior to Dec 31, 2017 will not be affected. Loans entered into on January 1 2018 and after are subject to a $750,000 cap. Verdict: I classify this as neutral. Taxpayers need to be aware of this threshhold change and make decisions in the future accordingly. If a taxpayer has a home with over $750,000 of acquisition debt, the taxpayer should be careful about refinancing that mortgage without checking with us about the impact. Taxpayers should also factor this change into any decision about future home purchases.