by: Joshua E. Levine, CPA
The final version of the Tax Cuts and Jobs Act was signed into law by President Trump on Friday, December 22, 2017. As expected, there are numerous changes and a majority of the discussion covers the increase in the standard deduction, elimination of personal exemptions and changes to certain itemized deductions. In addition, there are changes to the taxation of alimony received and deduction for alimony paid. Let’s go over some of these items.
Standard Deduction and Personal Exemption
For tax years beginning after December 31, 2017 and before January 1, 2026, the standard deduction is almost doubled to the following amounts:
The Act suspends the personal exemption by reducing the exemption amount to $0. In 2017, taxpayers may generally take a $4,050 deduction of taxable income for themselves, their spouse and dependents. The 2017 personal exemption is subject to certain phase-out limits based on adjusted gross income (AGI). See below for further details:
A single taxpayer that takes the standard deduction in 2017 and is not phased out of their personal exemption, will receive a total reduction of $10,400 to their taxable income. That same taxpayer will now receive a reduction of $12,000 to their taxable income beginning in 2018. A married couple with two dependents whose income is below the $313,800 phaseout in 2017 will receive a total reduction of $28,900 to taxable income, while that same family will only receive a total reduction of $24,000 to taxable income under the new Act. The Act does increase the child tax credit to $2,000 to alleviate some of the additional taxable income in 2018. Please note that the phase-out and refundability of this credit has changed with the Act.
Changes to Itemized Deductions
State and Local Taxes
The change to the state and local tax deduction has everybody talking and rushing to pay in their fourth state estimated tax payment by December 31, 2017. The Act allows for a taxpayer to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing separately) for the aggregate of state and local real property taxes, state and local personal property taxes, state and local, and foreign, income, war profits, excess profits taxes, and general sales taxes (if elected).
With the anticipation of the cap on state and local taxes, some tax practitioners are getting creative in regards to paying in as much state and local taxes in 2017 as possible. Let’s set the record straight – the Act contains a clause that states:
“an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.”
Certain states have made it possible to make estimated payments on their 2018 state tax liability prior to January 1, 2018. The IRS is stating that although the state income tax may have been paid in 2017, it will be treated as being paid in 2018. However, this rule does not prohibit the prepayment of assessed 2018 property taxes on or before December 31, 2017.
These strategies won’t matter if a taxpayer is subject to the alternative minimum tax (AMT), as state and local income, real estate, and personal property taxes are part of the add-back calculation to determine the AMT. The Act retains the individual AMT and increases the exemption and phase out amounts for each filing status.
Mortgage Interest Deduction
In 2017, taxpayers may take an itemized deduction for mortgage interest paid, limited to the first $1 million ($500,000 if married filing separately) of home acquistion debt and $100,000 ($50,000 if married filing separately) of home equity line of credit. The Act limits the mortgage interest deduction to the first $750,000 ($375,000 if married filing separately) of home acquisition debt, while the interest paid on home equity lines of credit is suspended. For tax years beginning after December 31, 2025, the prior limitations are restored.
The interesting point to note is that taxpayers will be grandfathered in to this limit. A taxpayer who has entered into a binding written contract before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018 and who purchases such residence before April 1, 2018, shall be considered to incur acquisition indebtedness prior to December 15, 2017. Therefore, the $1 million/$500,000 limitations continue to apply to taxpayers who incurred acquisition indebtedness before December 15, 2017.
Reminder for 2017, interest paid on home equity line of credit is an add-back in the AMT calculation, while interest paid on home acquisition debt is not included in the calculation.
How is Alimony Affected?
The Act calls for any divorce or separation agreement executed after December 31, 2018, or executed before that date, but modified after it (if the modification expressly provides that the new amendments apply to the 2017 Tax Cuts and Jobs Act), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in income of the payee spouse.
Per the House Bill that originally instituted this change, the intent of the provision is to follow the rule of the United States Supreme Court’s holding in Gould v. Gould, in which it was held that such payments are not income to the recipient. Income used for alimony payments is taxed at the rates applicable of the payor spouse rather than the recipient spouse. In layman’s terms, the IRS will receive a higher amount of tax revenue by keeping the income with the payor spouse.
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Joshua Levine is a Senior Associate at Samet & Company, PC. Josh joined Samet & Company, PC in 2012 after graduating from The Ohio State University. In his 5 years at Samet, Josh has involved himself with numerous service lines, including corporate and individual taxation. Josh actively keeps up to date with accounting pronouncements and tax law changes to craft a plan with his clients. Josh enjoys working with clients year-round and prides himself with the lasting relationships he has been able to establish. Josh can be reached at joshl@samet-cpa.com or (617) 731-1222.