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January 26, 2018 at 12:41 PM
The “Tax Cuts and Jobs Act,” a 1,097-page bill, should provide a boost to the U.S. economy and bring relief to many taxpayers. However, not everyone will benefit. In this post, I will highlight a few of the changes and discuss its potential impact.
Deductions-General
Standard Deduction
The standard deduction has been increased (see table below).
| Filing Status |
2017 |
2018 |
Increase |
| Single |
$6,350 |
$12,000 |
$5,650 |
| Head of Household |
$9,350 |
$18,000 |
$8,650 |
| Married Filing Jointly |
$12,700 |
$24,000 |
$11,300 |
Since taxpayers will use the greater of their standard deduction or their itemized deductions, fewer taxpayers will itemize. This could have a negative impact on charitable giving since charitable contributions are only deductible to taxpayers who itemize.
Personal Exemptions
The personal exemption, which has been part of the tax code (Section 151) and has existed in some form since 1862, has been eliminated.
In 2017, for example, taxpayers could deduct $4,050 for each dependent. Therefore, a family of five (ex: mom, dad, three children) could deduct $20,250 from their income (5 x $4,050). If the higher standard deduction and lower marginal tax brackets fail to compensate for the amount lost to the personal exemption, larger families will likely pay more federal income tax.
Itemized Deductions-Form 1040, Schedule A
Medical and Dental Expenses
These expenses were deductible to the extent they exceeded 10% of adjusted gross income (AGI) and only if you itemized (i.e. Form 1040, Schedule A). Under the new law, this percentage has been reduced to 7.5%, retroactive to Jan. 1, 2017. For example, if you itemize, incur $12,000 of qualified medical expenses, and your AGI is $100,000, you can deduct $4,500 ($12,000 – ($100,000 x 7.5%)). Using the former 10% of AGI limit, your deduction would only be $2,000 ($12,000 – ($100,000 x 10%)). For more on qualified medical and dental expenses, see IRS Publication 502.
State, Local and Property Taxes
The deduction for state and local income, sales and property taxes has been modified. Under the new law, there is a maximum deduction of $10,000 ($5,000 for married filing separately).
