The Tax Cuts and Jobs Act is the largest piece of tax reform legislation in 30 years and was signed into law on Dec. 22, 2017. For most of your clients, these tax changes impact tax year 2018, not tax year 2017. Overall, the changes associated with this act will lower taxes for individuals and small businesses.
Changes to the State and Local Tax Deduction
The itemized deduction claimed on Schedule A for state and local taxes is now limited to $10,000 ($5,000 if married filing separately) on the aggregate of the following items.
- State and local property taxes.
- State and local income taxes OR sales taxes – you can help clients choose the greater of the two.
There was no limit under prior law.
Note that the IRS has indicated that a prepayment of anticipated real property taxes that have not been assessed (generally when the taxpayer becomes liable) prior to 2018 are not deductible in 2017.
For taxpayers in high-tax states such as California and New York, this new limit beginning in 2018 can be a potential lost deduction and opens the door for some tax planning. It’s important to note that state and local income taxes are an alternative minimum tax (AMT) adjustment item, and many taxpayers lost the value of the deduction if they paid AMT in the past. Also, there is no longer a phase-out of itemized deductions for high-income earners.
Other Related Measures
The new act includes various other provisions that will impact the taxpayer’s tax liability for 2018 and need to be taken into account to find out the true impact of the reduced state and local tax deduction.
Here’s an infographic that recently ran on the Intuit® ProConnect™ Tax Pro Center that provides a glimpse at the impact for various clients, before and after the tax changes are applied. Keep in mind these are mock scenarios and your clients’ results will differ.
Lower Tax Rates. There are seven tax rates under the new law (10%, 12%, 22%, 24%, 32%, 35% and 37%) and are lower than prior law, which may result in a tax savings overall.
Standard Deduction Increased. The standard deduction for taxpayers not itemizing deductions on Schedule A is increased to $24,000 married filing joint, $18,000 head of household and $12,000 for other filing statuses. Consequently, fewer taxpayers will need to file Schedule A.
AMT Reduced. The AMT ensures people are taxed at a certain minimum rate on their income to make sure they pay their fair share. Under the new law, the exemption levels when the AMT kicks in have been increased to $109,400 for joint filers and $70,300 for unmarried taxpayers, and thus reduce the number of taxpayers subject to AMT.
Access the latest information about tax reform, including a new set of live webinars covering a variety of related topics, at the Intuit ProConnect Tax Reform Center.