The following is a quick introduction to the tax changes that may impact you (with one exception) as a result of the Tax Cuts and Jobs Act. This list is by no means exhaustive, but it will help you get your bearings on this bill.
SALT is an acronym for “state and local taxes” and relates to a filer’s ability when itemizing deductions to deduct state income taxes and/or sales taxes. In the past, there wasn’t any limitation on the deduction of state and local taxes (and for residents living in states with notoriously high taxes like California and New York, this was a significant advantage). The current tax reform bill retains the SALT deduction but caps the total deductible at $10,000, including income, sales and property taxes.
One of the most debated deductions in this tax reform bill was the mortgage deduction. Here’s where things currently stand:
Medical expenses are one of the most frequently used deductions. Before this tax reform bill, a deduction was permitted for unreimbursed medical expenses that exceeded 10% of your adjusted gross income. The current tax reform bill has lowered that percentage to 7.5% of your adjusted gross income.
Under the prior tax law, provided you itemized your deductions, you could deduct up to half of your income in eligible charitable donations, making it a popular deduction for people from all walks of life. The current tax reform bill raises that limit to 60% of your income, incentivizing charitable giving.
This is one of the changes that won’t apply to most people but which managed to get a lot of press. Inherited money and property incurs tax. Most recently, heirs have been taxed at a rate of 40% on any inherited property valued at over $5.49 million. In the current tax reform bill, individuals can claim a $11.2 million lifetime inheritance tax exemption and married couples can inherit up $22.4 million, tax free.
Like most things in life, the current tax changes are a mixed bag, but knowing what you’re dealing with will ensure that change – something that tends to be hard for just about everybody – can better be taken in stride toward a favorable outcome.