With Simplicity Comes Complication Pt. 4 of 6
In this 4th article of the series, we will discuss the simplicity that this new tax law promises and the difficulty of determining how this will impact you.
One of the stated goals of this new tax law was to “reform” the tax system in order to simplify tax return filing for a majority of taxpayers. To accomplish this, the new tax law doubles the Standard Deduction to $12,000 for those filing Single and $24,000 for Married Couples Filing Jointly. These amounts are indexed with inflation and may change each year. The idea is that this will decrease the number of taxpayers that will itemize their deductions thus allowing them to file their annual tax return on a postcard.
While simplicity in filing will likely result, homeowners will see a dilution of their tax benefits related to home ownership for two reasons:
Their Itemized Deductions related to home ownership may have been limited, and
An increased Standard Deduction lessens the gap between their potential Itemized Deduction and the higher Standard Deduction now available.
There are still many non-tax reasons to own a home. See a fuller discussion of these benefits in the fifth article of this series.
And, while doubling the Standard Deduction sounds like a big benefit to taxpayers, we must look at this in conjunction with the loss of Personal Exemptions (worth $4,150 for each exemption if the old law was kept for 2018). The loss of Personal Exemptions could, for some taxpayers, negate the benefit of the increased Standard Deduction.
Some families, however, will be able to use the increased Child Tax Credit (CTC) to offset the loss of these Personal Exemptions. The CTC has doubled from $1,000 to $2,000. This is a credit, dollar for dollar, against your federal tax liability. Further, the credit now applies to a wider range of families since the income phase outs have also been increased significantly to $500,000 for single and married couples (up from $55,000 single/$110,000 married couples).
Do not make any assumptions on whether this new tax law will either decrease or increase you tax liability without actually crunching the numbers. There are many changes that may swing your tax liability in different directions. You should consult with your tax expert on how all of these changes combine to impact your total tax picture. Keep in mind that the reduction in tax rates suggests a lower tax liability. According to the Congresses’ Joint Committee on Taxation, immediate tax cuts are projected for average Americans across all income groups.
A few other less common deductions related to home ownership have also been limited:
Casualty Losses are now only deductible where the federal government has declared a national disaster. Note that previous versions had eliminated this tax loss entirely.
Moving Expenses are no longer deductible except for members of the Armed Forces. Note that previous versions had eliminated this deduction entirely.
This is not an exhaustive list of changes. Various other deductions are also revised in the new tax law but we are trying to highlight tax changes related to home ownership.
Join us for the fifth of these 6 articles coming soon.