6 The yearly SALT deduction is capped at $10,000.
This is arguably the most controversial tax law change of 2018 for individual taxpayers. If you live in a high-tax state (or alternately, a state that imposes no income tax), you may be grumbling about the new cap on the state and local tax (SALT) deduction. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or (b) state and local income taxes or sales taxes annually. Taxes paid or accumulated as a consequence of trade activity or business activity are exempt from the $10,000 limit.
The SALT deduction cap is just $5,000 for married taxpayers who file their returns separately.1,6
7 The ceiling on the mortgage interest deduction falls to $750,000.
As the median U.S. home price is well under $750,000, a relatively small percentage of homebuyers will be affected by this change. The new annual $750,000 limit applies for any taxpayer taking out a home loan between December 15, 2017 and December 31, 2025. For those who arranged their mortgages prior to this window of time, the $1 million ceiling remains in place.
There is much more to note on this topic. When the Bipartisan Budget Act of 2018 became law on February 9, a pair of expired tax breaks were retroactively reinstated for the 2017 tax year: taxpayers still have an opportunity to deduct mortgage insurance premiums and may also exclude income from the discharge of debt on their principal residence, if eligible for such a deduction. Regarding mortgage insurance premiums, a taxpayer is fully eligible to claim that deduction when his or her adjusted gross income (AGI) is below $100,000 (a phase-out range occurs between $100,000-$110,000). The total of the mortgage insurance premiums is treated as additional deductible mortgage interest. 7
Homeowners should also be aware that the annual mortgage interest deduction is now just $375,000 for married taxpayers filing separately and that the deduction for interest paid on home equity debt has disappeared.2,6
8 The qualified medical expense deduction improves.
One of the few itemized deductions kept under the tax reforms also has a lower threshold this year. You can now deduct any out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income (AGI). This applies to qualified medical expenses in 2017 and 2018. (The old deduction threshold was 10%.)2,6
9 529 plan assets may now be used to pay for qualified elementary education expenses.
Prior to 2018, 529 plans were college savings vehicles only; assets within them were earmarked for payment of qualified higher education expenses. Now, federal tax law says you can also distribute up to $10,000 a year from a 529 plan to pay for K-12 tuition, tutoring, and linked curriculum materials and that these qualified distributions will be tax free. Some state laws governing 529 plans do not allow this, however. As a result, 529 plan participants in select states are being told to wait before devoting any 529 plan assets to elementary education, as they risk wading into a gray area in terms of tax law by doing so.6,8
Incidentally, funds from 529 plans may not be used to pay homeschooling expenses for students who would otherwise attend classes in grades K-12.8
10 No one may recharacterize a Roth IRA conversion.
Before this year, a traditional IRA owner who “went Roth” and subsequently changed his or her mind had a chance to undo the conversion within a certain time frame. This option is now disallowed.9
11 The federal estate tax exemption doubles.
Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%.2,6
12 Two changes apply to the charitable deduction.
The charitable deduction was retained amid the tax reforms, but middle-class taxpayers may have far less incentive to donate to charity than they once did due to the greater standard deduction. A pair of adjustments have been made. One, taxpayers can now deduct charitable donations equal to 60% of their incomes; previously, the limit was 50%. Two, charitable contributions made to a university or college that give the donor the right to buy sports tickets are no longer deductible.2
13 Certain types of discharged student loan debt are now exempt from income tax.
From 2018-25, no income tax will be applied to federal or private student loan debt discharged because of the borrower’s death or disability.
In the past, if a borrower died or became severely disabled while carrying an outstanding education loan balance, the lender could release the borrower from liability and reduce the debt to zero. The only problem: the I.R.S. viewed the discharged debt as the equivalent of income. A $10,000 discharged student loan would have ordinary income tax levied on it. Now, that will not happen. The new law does not mandate private lenders to discharge debt on these occasions, however.6
Securities offered through 1st Global Capital Corp., Member FINRA, SIPC
1 – cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]
2 – fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx [12/30/17]
3 – forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/ [12/17/17]
4 – cnbc.com/2017/12/22/tax-reform-breaks-may-help-parents-defray-child-care-cost.html [12/26/17]
5 – forbes.com/sites/kellyphillipserb/2017/12/21/how-will-the-expanded-child-tax-credit-look-after-tax-reform/ [12/21/17]
6 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]
7 – bkc-cpa.com/reinstatement-of-2017-expired-federal-tax-deductions/ [2/12/18]
8 – carneysandoe.com/blog-post/529-plans-education [2/6/18]
9 – taxfoundation.org/retirement-savings-untouched-tax-reform/ [1/3/18]
10 – forbes.com/sites/anthonynitti/2018/01/04/the-new-qualified-business-income-deduction-varies-based-on-your-business-type-or-does-it/ [1/4/18]
11 – rsmus.com/what-we-do/services/tax/washington-national-tax/net-operating-losses-after-the-tax-cuts-and-jobs-act.html [1/2/18]
12 – tinyurl.com/y7uqe23l [12/26/17]
13 – forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]
14 – ssa.gov/news/press/factsheets/colafacts2018.pdf [1/4/18]
15 – cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-11-17.html [11/17/17]
16 – medicareresources.org/faqs/what-kind-of-medicare-benefit-changes-can-i-expect-this-year/ [9/14/17]
17 – cms.gov/Medicare/New-Medicare-Card/ [1/3/18]
18 – irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions [11/29/17]
19 – trustetc.com/resources/investor-awareness/contribution-limits [1/3/18]
20 – irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged [10/19/17]
21 – pscpa.com/irs-issues-2018-cost-living-adjustments/ [11/1/17]
22 – ascensus.com/news/industry-regulatory-news/2017/10/19/irs-announces-2018-ira-retirement-plan-limitations/ [10/19/17]
23 – vox.com/policy-and-politics/2017/12/19/16783634/gop-tax-plan-provisions [12/19/17]
24 – blog.turbotax.intuit.com/tax-reform/government-shutdown-averted-and-tax-provisions-providing-tax-relief-passed-33358/ [2/9/18]