The New Tax Changes: Changes to Exemptions and Itemized Deductions

As the #1 boutique accounting firm in San Francisco and a leading tax preparation service for San Francisco Bay Area residents and business, we’re getting a lot of questions about the new tax changes. Therefore, we’re discussing some of the highlights in our blog. Be aware, however, that no two individuals or businesses are alike, and we strongly recommend that you reach out to us for a consultation on your tax needs. The tax changes are complex, and what the government giveth with one hand, it taketh away with the other. By working with a top tax accounting firm such as Safe Harbor, you can minimize the tax bite under the new law.

In this post, we’ll discuss changes to exemptions and itemized deductions.

Suspension of Personal Exemptions

Under new law, for tax years beginning after December 31, 2017 and before January 1, 2026, the ability to subtract personal exemption deductions from AGI has been suspended. Lower income earners were previously allowed to deduct $4,150 for each personal exemption, generally for the taxpayer, the taxpayer’s spouse, and any dependent.

Decreased Limit to Itemized Deductions

  • Home mortgage interest – Under pre-Act law, the home mortgage interest deduction is limited to acquisition indebtedness of $1 million. The limitation will be reduced to $750,000 under the new law.  However, taxpayers who entered into a binding written contract by December 15, 2017 to close on the purchase of a principal residence before January 1, 2018 and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to December 15, 2017, and will be allowed to use the current $1 million limitation. 
  • Home equity interest – Under pre-Act law, taxpayers would be able to deduct interest on qualifying home equity indebtedness up to $100,000 for regular tax purposes. For tax years through 2025, the home equity loan interest deduction will be repealed.
  • State and local taxes – Under new law, the deduction for state and local income or property taxes is limited to $10,000 for taxpayers ($5,000 for married taxpayers filing separately). Under the Conference Report, the bill specifies that taxpayers cannot take a deduction for 2017 for prepaid 2018 state taxes as these are considered deposits which are not tax deductible.San Francisco Tax Preparation Service
  • Charitable contributions – The Act increases the income-based percentage limit for charitable contributions of cash to public charities from 50% to 60%.
  • Miscellaneous itemized deductions – Certain miscellaneous deductions (unreimbursed employee expenses, tax preparation fees, and other expenses including investment fees and expenses) previously subject to the 2% AGI floor would be repealed through 2025 under the new Act.
  • Medical Expenses – The Act would reduce the threshold for deduction of medical expenses from 10% to 7.5% of AGI for the 2017 and 2018 tax years.

It’s Complicated!

Taxes are complicated enough, and the new tax changes hardly made the system less complex. In fact, many critics are complaining that the new tax law makes the system even more complicated. This is especially true for high income earners in San Francisco who may have substantial personal income, an investment property or two, perhaps own a home, or work at a start up or technology firm that pays compensation through stock options or other mechanisms. Our job as one of the leading tax preparation services in San Francisco is to evaluate your entire income and asset picture and create strategies to minimize the tax bite. By looking at the total picture, and not just once piece, we can do quite a bit under the new law.

Reach out to us, today, for a consultation on your tax preparation needs for 2017 (under the “old” law) and for tax advice for 2018 (under the “new” law). We’re easy to reach in San Francisco, and we can also talk over the phone or via WebEx. We make it easy to do taxes!

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