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Tax Reform: Itemized Deductions, the Standard Deduction and Personal Exemptions

 

 

After a year of congressional debate, the Tax Cuts and Jobs Act was signed, and extensive reform to US tax laws takes effect for 2018 tax returns. This new law imposes certain changes that will last until 2025, at which point Congress will need to take action if they want to keep these new tax rules in place. Changes to itemized deductions, the standard deduction and personal exemptions are significant and will affect the majority of taxpayers.

 

ECS Financial has highlighted some of these changes below:

Medical and Dental Expenses

Medical and dental expenses continue to be deductible to the extent they exceed a specified threshold. The threshold for deducting medical and dental expenses was reduced from 10% to 7.5% of adjusted gross income (“AGI”) for 2017 and 2018, but returns to 10% for 2019 and future years.


Taxes You Paid

 

Real estate taxes, personal property taxes, state income taxes, and sales taxes are all deductions that fall into this category. These taxes all remain deductible, but the combined deduction will now be limited to $10,000 for single filers as well as married filing jointly ($5,000 for married filing separately).  This will affect many taxpayers who currently itemize deductions. On the bright side, an individual can still take the full deduction for this category when it relates to income producing activities, like self-employment income or rental property.

 

Interest You Paid

 

Home mortgage interest deductions are also subject to major changes in 2018. The deduction prior to 2018 was limited to mortgage interest on acquisition debt of $1 million ($500,000 for married filing separate), and home equity interest on loans up to $100,000. In 2018 the deduction for interest on a home equity loan was eliminated completely, and the acquisition debt limit is being reduced to $750,000 ($375,000 for married filing separately).  Home acquisition debt acquired before December 15, 2017 is grandfathered up to the $1 million amount.  Taxpayers with home equity debt should trace the use of such funds, as debt that is considered acquisition debt would still be deductible, subject to the $750,000 limit.  Additionally, interest from debt  used for investment purposes may qualify for the investment interest expense deduction.

 

Charitable Contributions

 

Previously contributions to public charities were generally limited to 50% of adjusted gross income.  This limit is being increased to 60% in 2018. Certain institutions of higher education offered the right to purchase tickets or seating at an athletic event for individuals that made a charitable contribution. A taxpayer could d