Personal exemptions are eliminated, but credits are provided for qualifying children and dependents. The standard deduction has increased. There are many changes to itemized deductions, including a decreased deduction floor for medical expenses, a $10,000 cap on state and local tax deductions, a decreased mortgage interest deduction to loans that do not exceed $750,000, and an increased contribution base for charitable contribution deductions.
In 2017, taxpayers who were not subject to a phase-out were able to deduct personal exemptions to reduce taxable income. In addition, depending on the circumstances, they either claimed the standard deduction or reported itemized deductions on Schedule A to further reduce taxable income.
The TCJA eliminates personal exemptions but provides credits for qualifying children and dependents. For individuals whose threshold amount does not exceed $400,000 for a joint return ($200,000 for other taxpayers), the credit is $2,000 for each qualifying child and $500 for each qualifying dependent.
The TCJA also increases the standard deduction as follows.
If you’re age 65 or older, blind or disabled, you can add an additional $1,300 to your standard deduction ($1,600 for unmarried taxpayers). Yes, that extra money is on top of the standard dollar amount available to taxpayers within your filing status.
In addition, the TCJA includes changes to most of the Schedule A itemized deductions.
Medical expense deduction
The deduction floor for medical expenses was decreased from 10 percent of adjusted gross income to 7.5 percent of AGI. All taxpayers can write-off qualifying medical expenses that exceed 7.5 percent of their adjusted gross income (AGI) in 2017 and 2018. After 2018, the threshold adjusts to 10 percent of a taxpayer’s AGI. This change applies to all taxpayers for the 2017 and 2018 tax years. The 7.5 percent threshold has been in place for individuals aged 65 years or older for several years. Taxpayers who are 65 years and older can apply the decreased deduction floor to tax years 2013 through 2016, provided they were at least 65 in each of those years.
There are also two important modifications for property owners, a cap on state and local taxes, and a lower applicable mortgage amount for interest deduction.
State and local taxes
Under the new tax plan, taxpayers can deduct up to $10,000 in state and local income taxes. Previously, there was no cap on the amount you could write-off. Filers simply had to choose between deducting their state income tax or sales tax; both were not deductible together. All other state and local taxes, such as property taxes, could be deducted together.
Moving forward, you still have to choose between deducting state income tax or sales tax. And you can still deduct property taxes. That total simply can’t exceed the $10,000 threshold for tax year 2018.
Mortgage interest deduction
The applicable mortgage amount for the mortgage interest deduction was decreased from $1 million to $750,000 for mortgages obtained after December 15, 2017. That’s for both a primary and secondary residence. For taxpayers who included interest from a home equity line of credit in the deduction, the deduction is available only if those proceeds were used for home improvement.
For taxpayers who included interest from a home equity line of credit in the deduction, the deduction is available only if those proceeds were used for home improvement. Until now, individuals tapped the equity in their homes to pay off credit card debt, take a vacation, or finance their child’s education. But on 2018 returns no deduction can be taken for interest on a home equity loan, regardless of when you obtained it. If you use the proceeds to add an addition to your home or make other substantial improvements, the interest is viewed as acquisition indebtedness, which is deductible subject to the overall limit above.
Charitable contribution deduction
For the charitable contribution deduction, the contribution base was increased from 50 percent to 60 percent. That said, the increase in the standard deduction rates may make it harder for some individuals to reap the tax benefits of donating. Charitable contributions can still potentially affect your state return though.
If you previously itemized your deductions, you may no longer need to do so because the standard deduction doubles for tax year 2018. That means, unless the value of your itemized deductions totals more than the new $12,000 standard deduction for Single filers, it’ll likely be more worthwhile to claim the standard deduction. In that case, your charitable contributions will not impact your 2018 federal tax return like they may have in previous years.
Child Tax Credit
In 2018, the Child Tax Credit (CTC) doubles in value from $1,000 to $2,000. Additionally, $1,400 of the credit is now refundable. That means after your tax liability is paid, you will receive any remaining refundable portion of the credit in a tax refund. But like most tax credits, the amount available is subject to phase-outs beginning with an adjusted gross income (AGI) of $200,000 for single taxpayers and an AGI of $400,000 for those filing a joint return.
New credit for non-child dependents
Taxpayers with dependents that do not qualify for the CTC can claim a new nonrefundable credit of $500. That applies to every child and non-child dependent that is older than the CTC requirements.
The credit can’t be claimed for the taxpayer themselves or their spouse, however.
Child and Dependent Care Tax Credit
A credit not impacted by the tax reform changes is the Child and Dependent Care Tax Credit. If you paid someone to care for your child, like a daycare center, a babysitter or summer camp, while you worked, you may qualify to claim that credit.
Education tax benefits
The new tax reforms still allow taxpayers with student loans to claim a deduction of up to $2,500 for the interest paid on those loans each year. One key piece of this deduction for those who qualify is that it can be claimed without itemizing deductions. It is considered an “above-the-line” deduction, meaning it is subtracted from your income before any other deductions and lowers your AGI.
The student loan interest deduction is subject to phase-outs, however. As a Single filer, once your income reaches $65,000, the deduction value is reduced. It goes away entirely if your AGI is $80,000 or more.
And, despite the initial concern, graduate students are not required to pay income tax on any tuition waivers.
Several other areas of education-related tax benefits also remain untouched. Employers can still give their employees up to $5,250 in tax-free tuition reimbursements and the American Opportunity and Lifetime Learning credits stay the same.
One notable change in education tax law surrounds 529 savings plans. Up to $10,000 in those accounts can now be used to cover the cost of K-12 education annually. That includes some expenses related to homeschooling. Previously those funds could only pay for college tuition and fees.
There was also an elimination of other deductions, including those for job expenses and miscellaneous expenses. The casualty and theft loss deduction was also eliminated but remains available if the loss resulted from a federally declared disaster.