Loss of Tax Deductions, Gains of Tax Credits

posted by Bil Lako - 1.16.18

We were promised simpler taxes! Remember the “you’ll be able to file taxes on a postcard-sized form?” Despite what you may have read about the Tax Cuts and Jobs Act, the new laws did simplify taxes for many in the middle class. In simplistic terms, the law doubled the standard deduction and eliminated several tax deductions.

Ideally, fewer people will itemize; however, many may pay less in taxes.

While there are still seven marginal tax brackets, only the lowest bracket remains unchanged. The other income brackets have lower marginal rates attached, meaning most Americans should see more take-home pay in February when withholding tables are modified. Next, the standard deduction has nearly doubled from $12,700 to $24,000 for married filing jointly and from $6,350 to $12,000 for single filers.

Tax credits are dollar for dollar against your tax liability, making them more powerful than deductions

Personal exemptions being eliminated seems to be the biggest blow—the deduction you could take per taxpayer and dependent. Essentially, this was rolled into the larger standard deduction. The child tax credit doubled from $1,000 to $2,000, and the phase-out level for this credit increased to $400,000 for married couples. Before, this credit began phasing out at $110,000 for married filing jointly. Tax credits are dollar for dollar against your tax liability, making them more powerful than deductions. While some families may see an increase in their tax liability, the higher take-home pay may still feel beneficial as monthly cash flow can be very meaningful.

Let’s look at a family that files married filing jointly and has three children. Their adjusted gross income is $130,000. Under the old tax laws, they itemized, taking deductions for state and local taxes of $6,300, mortgage interest of $12,300, and property tax of $2,127. As a family of five, they had personal exemptions of $20,250. Their taxable income was $89,023, and they owed $13,733 in income tax. They received no benefit from child tax credits since their AGI was above the phaseout. Under the Tax Cuts and Jobs Act, their standard deduction is $24,000—$3,273 more than their itemized deductions. Without the personal exemptions, their taxable income is $106,000. With the 22% marginal tax bracket, they would owe $15,199 in taxes. However, with the child tax credit of $6,000 for their three children, their net federal tax liability is reduced to $9,199 – a tax savings of $4,534. Note, married couples in the same financial situation with no children will save $1,572 under the new law.

The most popular itemized deduction, according to The Tax Foundation, are state and local taxes, which are now combined with property taxes and capped at $10,000. This limitation affects those who live in high tax states most. While mortgage interest is still deductible, it is only deductible on the first $750,000 in principal value. With the median price of homes in the United States around $259,000, this limitation seems to affect the wealthy. All taxpayers are losing the deduction for home equity loan interest after Dec. 31, 2017.

If you’re moving for work, reimbursements from your employer for moving expenses will now be included in your gross income for tax purposes. Unreimbursed moving expense deductions are eliminated. Additionally, job expenses and certain miscellaneous itemized deductions were also eliminated through 2025. Before, you could deduct certain miscellaneous itemized deductions to the extent they exceeded 2% of your adjusted gross income. These included unreimbursed employee expenses, investment expenses, and tax preparation fees.

While this seems like a lot of deductions to lose, the Tax Cuts and Jobs Act is meant to stimulate economic growth. The most significant tax cuts are for corporations, which should result in more corporate spending. More specifically, it could also result in corporations paying higher wages and bonuses, incurring more capital expenditures, and hiring more people. Ideally, this growth drives the economy. While some wealthier taxpayers may be hurt by the loss of tax deductions, they may be able to make it up in potential market gains.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.