As summer vacations wind down and the weather begins to turn, it is a good time of year to tackle all those matters that have been put off over the Summer months. For some of us, ‘taxes’ is one of those matters.
You may recall that a new tax law went into effect this year but may be a bit hazy on just what went down. As a refresher, on December 22, 2017, President Donald Trump signed into law a comprehensive revision to the United States Internal Revenue Code known as the Tax Cuts and Jobs Act.
The Act, often simplified as TCJA, made widespread changes to both individual and corporate taxation. Many of the corporate changes were permanent, while most individual changes only apply to years 2018 – 2025.
The TCJA captured the attention of taxpayers across the country as everyone eagerly awaited analysis as to whether or not the law changes would have a favorable or unfavorable impact on his or her tax burden.
Providing thorough commentary on the comprehensive tax consequences to individuals in the form of income, gift, and estate taxation is beyond the scope of this article.
Rather, this post focuses on perhaps the flashiest change within the TCJA: the changes to Form 1040, Schedule A, also known as itemized deductions.
To incentivize the claiming of the standard deduction over itemized deductions, the TCJA raised the standard deduction for each filing status to nearly twice the previous amount.
However, as a counterbalance simplification tactic, personal exemptions for taxpayer, spouse, and dependents were eliminated. The following chart summarizes the difference between the ‘old’ and ‘new’ standard deduction for various filing statuses:
|Filing Status||2017 Standard Deduction||2018 Standard Deduction|
|Married Filing Separately||$6,350||$12,000|
|Head of Household||$9,350||$18,000|
|Married Filing Jointly||$12,700||$24,000|
This means that taxpayers who have been accustomed to itemizing deductions may now be better off electing the standard deduction. This change to the standard deduction amount, although significant, was only the tip of the iceberg as the TCJA also made comprehensive changes to how each subcategory within itemized deductions is calculated.
To better explain this, let us walk through the 1040 Schedule A from top to bottom and highlight the most notable changes to each subcategory of itemized deductions.
Medical and Dental
State and Local/Municipal Taxes Paid
Casualty & Theft Losses
Miscellaneous Itemized Deductions
To bring these changes to life, below are two brief examples of sample taxpayers with identical amounts of income and expenses in 2017 and 2018. The only change is the application of the tax law.
|Example 1||Example 2|
|Sum of Itemized Deductions||$12,800||$7,000||$37,000||$27,000|
In Example 1, we see the taxpayer itemized in 2017, but should claim the standard deduction in 2018.
In Example 2, the taxpayer’s itemized deduction amount has been reduced by $10,000 as a result of the new law, however taxpayer still benefits by itemizing deductions.
Overall, the Tax Cuts & Jobs Act reform means that fewer taxpayers will benefit from itemizing deductions on a consistent yearly basis and will instead find themselves taking the standard deduction.
In our next blog post, we’ll discuss some new long-run tax reduction strategies that have been made available as a result of the TJCA. Stay tuned for a discussion of such strategies, how they work, and which ones may best apply to you.
Reader note: this post is the first of a two-part series discussing the recent tax law changes to the various components of itemized deductions included in the Tax Cuts and Jobs Act.
Jason Hass is a Tax Advisor at Wealthquest, a Cincinnati-based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.