Some Deductions Survived the Recent Tax Reform Bill
By Christine Hall
While in the process of being approved, it was difficult to keep up with the various versions of the new tax bill. Each branch of the government had its own version of the law and, although each one was similar to the other, some of the differences were actually fairly significant.
Now that the final bill has been passed we can all get a clearer understanding of the new bill. Here are a few of the deductions and credits that survived.
1. Mortgage Interest Deduction
While the House bill repealed the mortgage interest deduction, the final version of the act retained it, albeit with modifications. First, the allowed interest deduction is limited to mortgage principal of $750,000 on new homes (i.e., new ownership). For prior tax years, the limit on acquisition indebtedness was $1 million. Existing mortgages are grandfathered in, however, and taxpayers who entered into binding contracts before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchase such residence before April 1, 2018, are able to use the prior limit of $1 million.
2. Personal Taxes: State and Local Income Tax, Sales Tax and Property Tax
In prior years, taxpayers who itemized were allowed to deduct the amount they paid in state and local taxes (SALT) from their federal tax returns. Slated for repeal (with the sole exception of a state and local property tax deduction capped at $10,000) under both the House and Senate versions of the tax bill, SALT remained in the final tax reform bill in modified form. As such, for taxable years 2018 through 2025, the aggregate deduction for property taxes, state, local, and foreign income taxes, or sales taxes is limited to $10,000 a year ($5,000 married filing separately).
3. Educator Expense Deduction
Primary and secondary school teachers buying school supplies out-of-pocket are still able to take an above-the-line deduction of up to $250 for unreimbursed expenses. Expenses incurred for professional development are also eligible. This deduction was made permanent with the passage of PATH Act of 2015 and survived tax reform legislation that passed in 2017 as well.
4. Plug-In Electric Drive Vehicle Tax Credit
Also slated for elimination in the House bill (but retained in the final tax reform bill) was the tax credit for the purchase of qualified plug-in electric drive motor vehicles, including passenger vehicles and light trucks. For vehicles acquired after Dec. 31, 2009, the minimum credit is $2,500. The maximum credit allowed is limited to $7,500. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after Dec. 31, 2009).
5. Medical Expense Threshold Amounts
The House version proposed a repeal of the itemized deduction related to medical expenses but it was retained (and temporarily lowered) in the final tax reform legislation. For tax years 2017 and 2018, the threshold amount for medical expense deductions is reduced to 7.5 percent of AGI. Under the PATH Act of 2015, the medical expense deduction increased to 10 percent of AGI (effective for tax years 2013 to 2016).
If you’re wondering whether you should be taking advantage of these and other tax credits and deductions, check with your tax preparer and remember, these changes do not take effect until next filing season.