The 500-page tax law recently signed by President Trump made big changes to a lot of pieces of the tax code, including eliminating or limiting some deductions that American families have relied on to decrease their tax bills. In other cases, some deductions or exemptions were expanded. Here are some of the biggest ways these changes could impact you:
Millions of Americans own a home or plan to buy one in the future, but the new tax law shrinks some of the tax benefits to homeownership. These changes impact not just those who live in states with high property taxes or areas with high home costs, but also those who have taken out home equity loans – or loans taken out using a home as collateral – to help pay for unexpected medical expenses as well as to pay off high-interest debts.
Will this change affect you? If you usually itemize your deductions, then yes. Prior to 2018, nearly all taxpayers who itemized their deductions took the SALT deduction, and more than 50 percent of the total amount of the SALT deduction went to taxpayers with adjusted gross incomes under $200,000. Additionally, over 60 percent of deductions from taxpayers who made less than $50,000 in income came from property tax.
Additionally, since the SALT cap is the same amount ($10,000) for both single and married filers, many married taxpayers in particular will get less of a benefit. Georgetown Law Professor Lilian Faulhaber referred to this tax hit as a “pretty clear marriage penalty.” “Two unmarried taxpayers both paying $10,000 in SALT … will get an aggregate $20,000 when they file, whereas if they get married they suddenly lose $10,000 in deductions,” said Faulhaber. Filers in states like New Jersey, Illinois, Texas, New York, California, and Pennsylvania – which account for more than half of the people who take the SALT deduction – will be especially hurt by this change.
Home values could fall
Because more people will opt to take the standard deduction over itemizing their tax returns – due to the smaller cap of the mortgage interest deduction, the new SALT cap, and the larger standard deduction – it is possible that the value of your home will decrease. Estimates are that only 14 percent of homes will be worth enough for it to make sense for homeowners to itemize their deductions to take advantage of the mortgage interest deduction, a dramatic decrease from previous law. When potential homebuyers decide how much they can afford to spend on a home, they tend to factor in the savings from the mortgage interest deduction. However, since many fewer potential buyers will be using the deduction, the price of your home might have to decline to account for the change.
Job and Moving Expenses
A lot of employers require you to buy certain things for the job, but do not reimburse you for the cost of them, including medical tests, uniforms, unions dues, home office costs, continuing education, and license and regulatory fees. In the past, taxpayers could deduct these and other job-related expenses if they added up to more than 2 percent of their gross income. The new tax law has eliminated this deduction entirely. That means salespeople can no longer write off their travel expenses, nurses can’t deduct the cost of their scrubs, and Americans who work from home can no longer deduct the cost of their home office. The doubling of the standard deduction will mitigate the loss of these deductions for some people, but those who have a lot of unreimbursed business expenses will feel the pinch.
Additionally, the new tax law eliminated the deduction for moving costs related to a new job. Under the old law, you could deduct reasonable moving expenses if the commute to your new employer from your new home was at least 50 miles further from your old home compared with where your old job was. The elimination of this common deduction has already kicked in.
Natural Disaster and Theft Losses
Disaster can strike anytime – be it a fire, flood, earthquake, or even a burglary. Under the old tax system, a taxpayer could claim a deduction for losses on personal property so long as (1) the insurance company was unable to provide compensation, and (2) the total amount of those losses exceeded 10 percent of the taxpayer’s adjusted gross income. More than 70,000 filers claimed casualty losses on their 2015 tax returns, resulting in $1.6 billion in claims, and hundreds of thousands more took advantage of these deductions in the past to help alleviate their costs after a major disaster destroyed their home or damaged their possessions. Unfortunately, under the new tax law, you can no longer deduct those damages, unless the president decides to make a disaster area declaration – something that happens in only the most extreme cases.
Tax Preparation Fees
The law also eliminated the deduction for tax preparation fees, which seem to increase every year. Under the old law, the fees that you paid to an accountant – or even an online tax preparation service – were tax deductible. Last year, the National Society of Accountants reported that on average, the most common tax preparation (federal and state income tax) cost $273 for people who itemized their returns, or $176 for those who didn’t. That amount is no longer deductible from your total tax bill. However, because of all the changes in the tax law this year, it will take more time and money to prepare your taxes.
Despite all of these changes, the new tax law did not eliminate all deductions. It broadened the deduction for unreimbursed medical expenses to 7.5 percent of a person’s adjusted gross income if they choose to itemize their deductions, which will be less likely given the larger standard deduction; however, that benefit only applies for 2017 and 2018. After this year, it reverts back to the old amount.
The law also doubled the estate tax exemption. Under the old law, an individual could shield up to $5.6 million of their estate from taxation upon death. According to the Tax Policy Center, just 5,460 families in the United States will pay estate taxes this year. Under the new tax law, the amount that people can shield from that tax doubles – so the tax kicks in just for people who have estates worth more than $11.2 million (or couples with estates worth more than $22.4 million), so the number of families subject to the estate tax will further shrink in coming years.