I am sure we are all aware of the major tax reform passed by congress in 2017 and tax code interpretation releases by the IRS to be take effect in 2018.
Changes made to tax code are always unveiled yearly based on the inflation and cost of living changes.
It is very important you read this because the updates and the new rules passed by the congress through the Tax Cuts and Jobs Acts (TCJA) would affect your tax return and on how much you may owe or losing some tax benefits.
Here are tax deduction changes you need to know
UNLIMITED STATE AND LOCAL TAX DEDUCTIONS
In the previous law, there is room for you to claim an itemized deduction for an unlimited amount of personal property tax and state and local income tax.
The old law also allows you choose whether to forego any deduction for state and local tax income and opt for deduction in state and local general sales tax.
But in the new law, there is limit to what you can deduct for property tax and state and local income. The current limit is $10,000 but if you are filing separately as a married person it is $5,000.
This implies that there is no room for deducting foreign real property tax. Also, property tax write-off for your place in Cabo is baseless.
However, the new rule still allows you to choose the option of deducting your state and local sales taxes instead of deducting the state and local income taxes.
If you will be filing your tax jointly as a married couple, there will be an increase in standard deduction of $24,000 from the $12,700 of 2017.
If you are married and filing your tax separately as a single tax payer, you now have a $12,000 standard deduction up from the $6,350 of 2017.
To round this section up, deductions for heads of household will be $18,000 up from $9,350 of 2017.
THE MEDICAL EXPENSE DEDUCTION HAS BEEN EXPANDED
The new law preserved the deduction for medical expense which would have been killed by the house version of the tax reform bill and expands it to cover 7.5% excess of medical expense as against the 10% threshold for 2018.
This means since the new law makes it easier to exceed the percentage of the Adjusted Gross Income (AGI) deduction, you may decide to load up elective medical expenses like dental work and vision care between now and the end of the year if it may net you a bigger 2018 deduction.
For taxable years beginning after December 31,2018, individuals may claim medical expenses, only to the extent that such expenses exceed 10-percent of adjusted gross income.
Another change in the new rule is the elimination of personal exemptions. Many households might see the increased standardized deduction as welcome news but they need to consider the catch as there will be losing personal and dependency exemptions.
CHANGE IN THE LIMIT ON HOME MORTGAGE INTEREST DEDUCTION
The new rule has reduced the maximum amount of mortgage debt that can be deducted. The old law gives taxpayers the privilege to deduct interest on a mortgage of up to $1 Million but the new law that will take effect 2018 only allows deduction in mortgage value capped at $750,000.
However, it is important to add that the new rule has no effect on home acquisition mortgages taken out under binding contracts in effect before 16th December 2017 as long as the purchase of the home has closed before the 1st of April 2018.
UNRESTRICTED DEDUCTION RELATED TO NATURAL DISASTERS
The old law allows deduction of at least a portion of any losses incurred by natural disasters like floods, wildfires and hurricanes which were not covered by insurance or other relief program on their tax.
But the new law does not give everyone access to the deduction. Despite the fact that the restriction is the same, the new law states that you must be in a presidentially designated disaster zone.
CONTRIBUTION LIMITS FOR RETIREMENT SAVING
The new law allows employees who participate in the Thrift saving plan and certain retirement plans – most 457, 403(b) and 401(k) plans to contribute as much as $18,500 (i.e. a $500 increment from the 2017 $18,000 limit.)
MISCELLANEOUS ITEMIZED DEDUCTIONS
This is another salient but yet significant change in the new law. The new law now disallows the unreimbursed work expenses and unreimbursed qualified employee education expenses deduction. Professional dues, Investment fees, cost related to tax preparation service fall under miscellaneous itemized deduction.
Itemized deduction can only be done if the total amount of miscellaneous expenses is more than 2% of one’s adjusted gross income.
CONTRIBUTIONS TO ROTH IRAs
Income phase out has been raised from $120,000 to $135,000 for individuals who are single or the head of their household. The range also climbs from $189,000 to $199,000 for married coupled filing their tax jointly.
But the new law does not adjust the range for married individuals filing return separately.
OTHER IMPORTANT CHANGES AND NON-CHANGES IN THE NEW RULE INCLUDE;
When was the last time you read an educative and insightful article like this? If you think the article is worth your time, then it is bad if you decide to hoard this valuable information. Keep your family and friends abreast of the changes in tax deduction by sharing this article with them.