By now, the major provisions of the tax reform have been discussed in the media and most people are aware of things like the increased standard deduction, the limitation on the deduction for state and local taxes, and the lower tax rate for corporations. There are also some provisions that garnered less press, but may affect you beginning this year. Like most of the items that pertain to individual taxpayers, these changes are for tax years 2018 through 2025. After that, things go back to the way they were in 2017 unless congress takes additional action.
The Pease limitation on itemized deductions is suspended. This is the rule that limited your itemized deductions if you had income over a certain threshold. Married couples who had income above $313,800 were not allowed to deduct all of their itemized deductions in 2017. Now, there is no limitation.
The child tax credit is doubled to $2,000 for each qualifying child, and the phase-out threshold is significantly increased, so more taxpayers will be eligible for the credit than before. Another change which got less attention is the new $500 nonrefundable credit for each dependent who is not a qualifying child. This means you can still get a credit for your dependent children who are over sixteen years old. Previously, the child tax credit did not apply for a child who turned seventeen. You may also get a credit if you have dependents who are not your children, such as elderly parents.
Section 529 qualified tuition plans may now be used to fund elementary or secondary school. Although there is a $10,000 limit per beneficiary per tax year, this could be very useful for anyone who pays tuition for their children. Anyone may contribute to a 529 plan (parents, grandparents, friends, etc.), and the money is invested. Both the principal and the earnings may be withdrawn in order to pay tuition. No income taxes are paid on the growth. If the plan is set up when a baby is born, there could be significant growth by the time the child is school age. There would be even more tax-free growth if the funds weren’t used until the child goes to high school.
Moving expenses are no longer deductible, but there are special rules for the military. Members of the Armed Forces may still deduct moving expenses and exclude moving reimbursements or allowances from income.
Miscellaneous itemized deductions are no longer allowed. This included items like tax preparation fees, unreimbursed business expenses, safe deposit box rentals, and investment fees. This is one area that actually may simplify taxes for many people who kept logs of their business miles and expenses. There is no need to keep records if nothing can be deducted, of course. Since all miscellaneous itemized deductions were only deductible when they exceeded 2% of adjusted gross income, many people never got a deduction anyway. Some of the people most affected by this provision will be those who pay high investment fees. For taxpayers with significant assets, it isn’t uncommon to pay many thousands of dollars to the investment broker. Now these fees cannot be deducted.
Charitable contributions are still deductible, but there are some changes. A taxpayer may now deduct up to 60% of his adjusted gross income instead of 50%, which won’t affect very many people. A wider reaching change, however, is that a deduction for college athletic seating rights is no longer deductible. Previously, 80% of the license fee was deductible. The actual cost of the tickets has never been deductible.
There are numerous other provisions that apply in very specific cases, of course. And for many of these new rules, we still need further guidance and clarification from the IRS to help us apply the law in certain circumstances. What we know for certain, however, is that virtually every taxpayer will be affected by some part of this sweeping legislation.
Contact Alloy Silverstein for further guidance on planning for tax reform.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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