Deductions for Individual Taxpayers

Last week we discussed the proposed tax rates under the new bill. This week we’ll take a look at deductions.

Standard deduction: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019.

Deductions: The overall limitation of itemized deductions under Sec. 68 would be repealed, effective for tax years beginning after 2017.

Looks pretty good, right? Well, here is what you you are going to lose:

Personal exemptions: The deduction for personal exemptions, currently at $4,050 per person, would be repealed after 2017.

Many deductions would be repealed, effective for tax years beginning after 2017, including:

  • The Sec. 213 medical expense deduction;
  • The Sec. 215 alimony deduction;
  • The Sec. 165(c)(3) casualty and theft loss deduction (except for casualty losses associated with special disaster relief legislation);
  • The Sec. 212(3) deduction for tax preparation fees;
  • The Sec. 217 deduction for moving expenses;
  • The Sec. 220 deduction for contributions to Archer medical savings accounts (and employer contributions would no longer be excludable from income). Existing Archer MSAs could be rolled over tax-free into a health savings account.

Employee expenses: Under a new Sec. 262A, employees would no longer be allowed to take an itemized deduction for their expenses that are attributable to the trade or business of performing services as an employee. The above-the-line deductions for certain expenses of performing artists, officials, and elementary and secondary schoolteachers (Secs. 62(a)(2)(B), (C), and (D)) would be repealed. These provisions would be effective for tax years beginning after 2017.

Mortgage interest: The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on the aggregate amount of acquisition indebtedness would be reduced to $500,000 ($250,000 for married taxpayers filing separate returns), from the current $1.1 million. Also, taxpayers would be limited to one qualified residence for purposes of the mortgage deduction.

State and local taxes: The deduction for state and local income or sales tax would be eliminated, except that income or sales tax paid in carrying out a trade or business or producing income would still be deductible. State and local property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.

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What does all of this mean?

This bill is mostly going to negatively affect middle class Americans.

Let’s take a family of six, two parents and four qualifying children.

  • In 2016, this family would have six (6) exemptions worth $4,050 each. That is $24,300 in just exemptions.
  • The standard deduction in 2016 for joint filers was $12,600.
  • However, let’s assume that they itemize:
    1.  Washington Residents pay sales tax on goods – Assume this family paid $1,500
    2.  Real Estate Taxes – $6,000
    3.  Mortgage Interest – $12,000
    4. Charity Donation – $5,000
    5.  Tax Preparation – $300
    6.  Unreimbursed Employee Expenses – $1,000

In 2016, this family claimed $24,300 in exemptions and $25,800. That is a total of $50,100 off reduction of their taxable income. Assuming that this family made $85,000 in wages, this means only $34,900 is taxable. That means, under the current tax policy, they owe $4,302 in taxes, before any credits.

Now, let’s look at their tax liability under the new bill.

  • Exemptions = Disallowed
  • Standard deduction = $24,400
  • Itemized Deduction = $26,600
    1.  Sales taxes  = Disallowed
    2.  Real Estate Taxes (under $10,00, so allowed) = $6,000
    3.  Mortgage Interest – assume they purchased a new home and moved to Seattle where the average home costs over $750,000 – the expected interest on $750,000 30-year fixed mortgage is around $30,000 = Under the new bill, the deductible interest rate would be limited to around $15,600 for this taxpayer, due to the aggregate limit.
    4.  Charity Donations = $5,000
    5.  Tax Preparation = Disallowed
    6.  Unreimbursed Employee Expenses = Disallowed

Under this bill, this taxpayer and his family can only deduct $26,600 from their $85,000 income wages. This means that $58,400 is taxable as opposed to $34,900 from 2016. With the new tax rate at 12% for this family, their taxes under the proposed bill are $7,008, before any credits.

this family would pay on average $2,706 more Per year in taxes under the proposed bill.

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