The Tax Cuts and Jobs Act of 2017 passed last year was the biggest tax law change in a generation. Not since the Tax Reform Act of 1986 has tax legislation of this magnitude become law. The Tax Reform Act of 1986 was co-sponsored by Republicans and Democrats and passed with majority support by both parties. By contrast, the Tax Cuts and Jobs Act of 2017 (“the Act”) became law after an intensely contentious debate and passed solely with Republican support.
Regardless of what side of the political debate you were on, the Act is now law and it is important to understand the key changes and how they affect you.
STATE AND LOCAL TAX DEDUCTIONS:
One of the most hotly debated provisions of the Act concerned the deductibility of state and local taxes (sometimes referred to as “SALT”). In higher tax states like New York, the deductions are significant and their loss is a concern.
Many people pre-paid their 2018 local property taxes in 2017. After the passage of the Act, the IRS issued guidance on December 27, 2017 stating that pre-paid 2018 property taxes would be deductible if paid and assessed in 2017. See: www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017.
If a 2018 property tax bill was produced by a municipality in 2017 and paid in 2017 by the taxpayer, there’s a good argument it was paid and assessed in 2017 - but you should check with your tax advisor before seeking the deduction. Certain high income individuals who are subject to the Alternative Minimum Tax (AMT) may lose the value of the deduction because of the application of the AMT.
In addition to property taxes, most New Yorkers also pay state income taxes. The conference report for the tax bill stated that pre-paid 2018 state income taxes are not deductible on your 2017 income tax return. As a result, to the extent that you pre-paid your New York 2018 income taxes, you should not expect to be able to deduct those in 2017.
Looking forward to 2018 and beyond, SALT deductions are now capped at $10,000/year. To the extent that your state and local income and property taxes are less than $10,000/year, you should still be able to deduct them as an itemized deduction – subject to a potential loss of the deduction if the AMT applies to you.
STANDARD DEDUCTIONS, PERSONAL EXEMPTIONS, AND TAX CREDITS:
Although certain deductions, like the SALT deduction, are capped or eliminated in the Act, the effect will be minimal for many taxpayers because of the significant increase in the standard deduction. The standard deduction now stands at $24,000 for married filing jointly, $18,000 for heads of households, $12,000 for all other individuals. As a result of the increase, many taxpayers will find that itemization of deductions is no longer necessary because the total of potential itemized deductions will be less than the new, higher standard deductions.
In addition to the higher standard deductions, personal exemptions have been eliminated and the child tax credit was increased to $2,000 per qualifying child, with a maximum refundable amount of $1,400.
CHANGES IN OTHER POPULAR DEDUCTIONS:
After significant political wrangling, mortgage interest remains deductible with a $750,000 principal limit (down from a prior level of $1 million). On a related note, the capital gains tax exclusion rules upon the sale of a primary residence did not change.
There was also much debate about the future of medical expense deductions. In the end, the deduction was expanded to allow all taxpayers to deduct medical expenses to the extent they exceed 7.5 percent of their adjusted gross income (AGI) in 2017 and 2018.
Student loan interest was slated to be eliminated as a deduction in the House version of the bill, but it was restored in conference committee and survived to be included in the Act. Significant changes are on the horizon for the tax treatment of alimony. As of January 1, 2019, alimony will not be deductible by the paying spouse or includible as income by the receiving spouse.
TAX RATE CHANGES:
Individual marginal income tax rates have been lowered to a range from 10 percent to 37 percent, depending on income level. The federal estate tax exemption has been more than doubled to almost $11,200,000. Taxpayers who die with an estate valued at less than approximately $11,200,000 will therefore pay no federal estate tax. The New York state estate tax exemption currently remains at $5,250,000.
Tax law changes of this magnitude come infrequently, and it will likely take some time to fully understand the impact of the Tax Cuts and Jobs Act of 2017. With April 15th looming near, it is now time to make an appointment with your accountant or tax advisor to see how these changes may affect you.