Tax Reform Passed — What You Need to Know Now
Tax reform was passed by Congress this week and is expected to be signed into law soon. Most of the new laws take place in the 2018 and 2019 tax years, but there are a couple items that you need to know about right away for your 2017 taxes.
1. The medical expense deduction threshold was retroactively lowered to 7.5 percent.
The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2017 and 2018, but reverts back to 10 percent in the following years.
What this means. If you were not planning on using the medical expense deduction this year because you fell short of the 10 percent threshold, you may want to reconsider your situation before year end. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) before Dec. 31 to push you over the new, lower threshold, consider doing so. But you must act now.
2. The healthcare individual mandate penalty stays in place until 2019.
The shared responsibilty penalty (also known as the individual mandate) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2017 and 2018.
What this means. You still need to retain your Form 1095s this year and next in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of income. Unless there are further changes coming, 2018 may be the last year you’ll need to worry about the individual mandate penalty.
More changes to consider for 2018 tax planning
We’re experiencing one of most significant tax law changes in more than 30 years. There will be a lot of things to consider for 2018 tax planning. Here are some of the most significant:
- Reduced income tax rates across the board.
- Doubled standard deductions.
- Suspension of personal exemptions.
- New limits on itemized deductions, including:
- State and local tax deduction limited to $10,000.
- Mortgage interest deductions on new loans limited to $750,000 and elimination of home equity interest deductibility.
- Theft and casualty losses limited to federally declared disasters.
- Elimination of miscellaneous deductions subject to the 2 percent of adjusted gross income threshold.
- Boosts to:
- The child tax credit ($2,000 in 2018 and beyond).
- A new family tax credit.
- 529 education savings plan expansion for K-12 education.
- The estate tax exemption (doubled).
- Reduced taxation of small business pass-through entities including S corporations, partnerships and sole proprietors.
As of this writing the bill has not yet been signed by the president. Tax Tips in the coming weeks will present more details on the tax reform changes and how they are implemented by the IRS. In the meantime, reach out if you have urgent questions regarding your situation.