Individual Provisions in Tax Reform Part III

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

Last week, we reviewed the changes in standard deductions and child/family tax credit in 2018. This week, we will wrap up our discussion of 2018 individual tax changes by reviewing some of the new itemized deduction provisions.

The Good

Congress has considered reducing allowable medical expense deductions for individuals.  Currently, individuals’ medical expense deductions must exceed 7.5% of adjusted gross income to be deductible. That rate had briefly been increased to 10% of adjusted gross income.  However, 2018 tax reform retains the 7.5% level and makes no other changes to the medical expense deductions.

Charitable contributions were changed, but to the benefit of individuals. In prior years, certain cash contributions were only deductible if they exceeded 50% of adjusted gross income. Starting in 2018, the level is increased to 60% of adjusted gross income. As a result, charitably inclined individuals may be able to increase their allowable charitable contributions.

The Bad

Probably the most discussed change in 2018 tax reform was the reduction in the state and local tax deduction. Starting in 2018, individuals may only deduct up to $10,000 ($5,000 for married filing separately individuals) of state and local taxes (including income taxes and real estate taxes). While these changes do not affect state and local taxes deductible in a trade or business, we expect that this provision will result in more taxpayers claiming the higher standard deduction.

There was confusion early on when it was announced that home equity interest was no longer deductible. However, the IRS has recently clarified that certain home equity interest attributable to principal residence improvements will still be deductible.

The interest deduction on new home acquisition debt is also facing new limitations. Under prior law, interest paid on the first $1,000,000 ($500,000 for married filing separately taxpayers) of home acquisition debt was deductible. Effective for debt incurred on or after December 15, 2017, the new limitation is $750,000 ($375,000 for married filing separately taxpayers).

The Ugly

Perhaps the most limiting provision of the itemized deduction changes is the elimination of what are known as the “2% miscellaneous itemized deductions.” These deductions include:

  • Unreimbursed employee business expenses
  • Investment advisory fees
  • Tax preparation fees

We see a number of individual clients that are not reimbursed by their employers for work supplies and travel. This provision will hit this group hard. Consideration should be given to seeking out reimbursements from employers.

Next week, we will wrap up our series with a reflection on the new tax laws and what we expect to see in the next tax season. In the meantime, please call us at 630-953-4900 with your questions.