The Republican Congress had to scramble to find additional sources of revenue in order to make up tax reductions for corporation and lower tier income groups.
And they found some of that revenue by taking away deductions.
There are literally scores of smaller deductions that you were previously able to itemize that will not be available in 2018, or 2019 at the latest.
Let’s look at just some of the bigger ones.
Local Income Taxes
Everybody knows that state and local income taxes (SALT) will no longer be completely deductible. You will be allowed to deduct only up to $10,000.
That is especially painful for people who live in states with high income taxes and/or property taxes. And while Texas and other low-tax states don’t have an income tax, local governments are financed by property taxes that are typically higher than those of a lot of states.
Mortgages Above $750,000
Starting in 2018, homeowners can take a mortgage interest deduction on a loan of up to $750,000, down from the current limit of $1 million.
When the median home in California is $480,000, a lot of homeowners are going to have mortgages in excess of $750,000.
Personal Disaster Loses
I am not certain what Congress was thinking, but they took away the deduction for personal disaster losses. Now you can take deductions on personal losses if those losses amount to more than 10% of your income.
In the future, you can deduct those losses only if the president declares their cause a national disaster. So you would more than likely be able to deduct losses from a hurricane or earthquake.
But if your home were destroyed in a flood not associated with a larger disaster, you would not be able to take a deduction for your loss. The same thing goes for a fire. Or for vandalism.
This provision makes me wants to throw the yellow flag for piling pain on top of more pain.
Job-Related Moving Costs
Today, if you move more than 50 miles for a new job, you can deduct reasonable moving costs. Starting this year you can’t.
Alimony
Divorces are never fun or easy. They tend to cost a lot of money, on top of the emotional toll they take. Under current law, alimony is deductible by the former spouse making payments and is included as income to the recipient.
In the new bill, however, these payments are no longer deductible by the payor. Nor are the payments included in the recipient’s gross income.
Instead, the person getting the alimony has to pay taxes at the rate paid by the person paying the alimony. And since it’s usually the man who makes more money and pays the alimony, the woman will get taxed at the man’s tax rate.
No matter what her actual income is. Ouch. This provision is effective for divorce and separation agreements signed after Dec. 31, 2018.
Business Lunches and Other Entertainment
A Bloomberg article highlights the fact that business deductions for meals may be going away. Yes, corporations get a reduced tax rate, but essentially, the new law says that entertainment expenses are not deductible. Business lunches are entertainment and not deductible.
Ah, I remember the days when you could deduct 100% of your meals and entertainment. Yes, I know that during the Reagan years the top rate was 70%. But no one paid that. There were so many loopholes and deductions that my effective rate was much lower than it is today.
The problem is, there is a great deal of confusion over what might count as a deductible expense. If an expense is considered entertainment, it is not deductible. If you think that change is not going to make a difference in the revenues of high-end restaurants, you’re not paying attention.
I don’t think the change affects Chipotle or McDonald’s much—they’re not exactly business-meal destinations. There are always consequences to tax rules, but I think some of the unintended consequences are going to be more painful than people currently think. Corporate accountants are going to strictly limit the ability of their employees to take their clients out to dinner.
Lots of “Little” Things Are No Longer Deductible
Companies have been able to subsidize commuting and parking expenses and deduct them. No more. And that $20 a month subsidy you got for commuting to work on a bicycle goes away.
You can no longer deduct your cost for preparing taxes under the new tax plan, and if you do your own taxes, you can’t deduct the cost for the software.
No more deductions for the commissions you pay your agent or your manager or even for your union dues.
Hollywood actors and professional athletes are not going to be happy about that first part. If you’re an actor, you no longer get to deduct your audition travel expenses or acting lessons, either.
And while the new tax law nearly doubles the standard deduction for married couples and singles, up to $24,000 and $12,000 respectively, you do lose your personal exemptions.
Many families with multiple children will feel that loss of exemptions keenly. I can tell you from personal experience that having more than two kids is expensive. But then again, lower-income families get an enhanced child tax credit.
But to be fair, there are a number of really good portions of this bill. As noted above, the increase in the personal deductions will mean that fewer people on the lower income scale will pay any taxes at all.
Also, the lifetime state tax exemption doubled to $11.2 million for individuals and $22 million for married couples.
And with that I’m going to stop talking about taxes.
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