Other Deductions and Credits

What Changed

Family Tax Credits

The credit has been lifted to $2,000 per child under age 17 beginning in 2018. The maximum amount refundable—because a taxpayer’s credits exceed his or her tax liability—is limited to $1,400 per child.

The credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseouts of $110,000 and $75,000, respectively. However, the phaseout thresholds won’t be indexed for inflation, meaning the credit will lose value over time.

Beginning in 2018, a $500 nonrefundable credit will also be available for qualifying dependents other than qualifying children, such as a taxpayer’s parent, sibling, niece, nephew, aunt, uncle, or 17-year-old child.

All of the family tax credit provisions expire after 2025.

529 Plans

Distributions from 529 plans used to pay qualifying education expenses are generally tax-free. The definition of qualified education expenses has been expanded to include not just postsecondary school expenses, but also primary and secondary school expenses. However, primary and secondary school expenses are limited to $10,000 annually. This change is permanent.

State & Local Tax Deduction

Between 2018 and 2025, a taxpayer’s deduction for state and local taxes—including property taxes—is limited to $10,000 if they itemize their deductions. Additionally, the taxpayer still has the option to choose between deducting income taxes or deducting sales tax, but cannot deduct both.

Mortgage Interest Deduction

The tax reform act also tightens limits on the itemized deduction for home mortgage interest. Between 2018 and 2025, it generally allows a taxpayer to deduct interest on mortgage debt up to $750,000. However, the limit remains at $1 million for mortgage debt incurred (or under written contract) before December 15, 2017, which will significantly reduce the number of taxpayers affected.

The traditional deduction for interest on home equity debt is also suspended. Between 2018 and 2025, taxpayers can only claim deductions for such interest if the debt was used to buy, build or substantially improve the taxpayer’s home that secures the loan. The deduction is no longer limited to $100,000 of home equity debt, but is subject to the larger overall qualified residence debt of $750,000 discussed above.

Medical Expense Deduction

This itemized deduction will temporarily continue and is enhanced for those two years. The threshold for deducting such unreimbursed expenses is reduced from 10% of adjusted gross income to 7.5% for all taxpayers for both regular and alternative minimum tax purposes in 2017 and 2018.

Itemized Deductions Subject to 2% Floor

This deduction for expenses such as certain professional fees (e.g. tax preparation fees), investment expenses, and unreimbursed employee business expenses is suspended between 2018 and 2025. For employees that work from home, this includes the home office deduction.

Moving Expenses

The deduction for work-related moving expenses is also suspended between 2018 and 2025, except for active-duty members of the armed forces and their spouses or dependents who move because of a military order that calls for a permanent change of station.

The exclusion from gross income and wages for qualified moving expense reimbursements is also suspended, except for active-duty members of the armed forces who move due to a military order.

Personal Casualty and Theft Loss Deduction

Between 2018 and 2025, this deduction is suspended, except if the loss was due to an event officially declared a disaster by the president of the United States.

Charitable Contributions

The limit on the deduction for cash donations to public charities is raised to 60% of adjusted gross income from 50%. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated. Taxpayers must itemize to benefit from the charitable contributions deduction.

Alimony Payments

Alimony payments won’t be deductible—and will be excluded from the recipient’s taxable income—for divorce agreements executed (or, in some cases, modified) after December 31, 2018. Because the recipient spouse would typically pay income taxes at a rate lower than the paying spouse, the overall tax burden will likely be larger under this new tax treatment. This change is permanent.

Unchanged Credits and Deductions

No changes were made to these:

  • Exclusion for principal residence gain
  • Exclusion for employer-provided adoption assistance
  • Lifetime learning credit
  • Deduction for student loan interest
  • Deduction for graduate student tuition waivers

There has been an overall limitation on itemized deductions in prior years, but for tax years 2018-2025 that limitation has been suspended.

Planning Opportunities

Fewer taxpayers will take itemized deductions due to the significantly higher standard deduction. For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions—and perhaps even provide some additional tax savings. But these changes might also result in a higher tax bill, depending in part on the extent to which those taxpayers can benefit from these credits and deductions.

For those who do itemize, careful planning is critical to help identify each new opportunity.

More Resources

The IRS’s Notice 2018-76 provides some clarity on the deductibility of business meal expenses.

New tax reform provision allows more tax-free savings for education expenses as well as increased flexibility with 529 plans.

The IRS clarified that deductions for home equity loans, credit, and second mortgages are mostly unchanged with tax reform.

Tax reform will have a varying impact on the deductibility of charitable giving in 2018 and beyond.

Learn how technology executives who derive a significant amount of their income from stock-based compensation can benefit from proactive tax planning.

The Tax Cuts and Jobs Act has far-reaching implications for businesses and individuals that pay state income taxes. Our Insight has the details.

Individuals will need to consider the effects of President Trump’s tax reform in their 2017 income taxes.