TaxConnections


 

Senate Finally Approves and Passes Tax Reform Bill- Part II Deductions



Harold Goedde, Tax Advisor

The standard deduction will be doubled starting in 2018 and many taxpayers itemized deductions may be less than the standard deduction. To maximize itemized deductions in 2017, taxpayers should pay these in 2017.

(A) State and local taxes.

The House bill puts a $10,000 cap on these, but the Senate Finance Committee completely repeals the deduction. In light of this, the following actions should be taken for:

(1) Income and property taxes

Pay the 4th quarter estimated state and local income taxes before December 31 instead of January 2018 since the deduction may be eliminated or reduced for 2018. The same is true if taxpayers received an extension and have not paid the balance due.Pay any property taxes due in 2018 before December 31, 2017.

(2) Sales taxes

Taxpayers are entitled to a standard sales tax deduction for.state and local sales taxes based on AGI. In addition, they can deduct additional sales tax paid on major items (e.g., autos, trucks, boats, furniture and major repairs that are not capitalized). If purchases of these items are being considered, pay for them before December 31, 2017.

Medical expenses

The Senate Finance Committee bill eliminates the deduction but the full Senate may preserve or further limit the deduction(presently, medical expenses are deductible to the extent they exceed 10% of AGI). If taxpayers are going to incur large medical expenses, pay them before December 31, 2017. Many taxpayers have long-term care and medical insurance policies whose premiums are considered a medical expense, but there is an income limit on the deduction for long-term care insurance. If any premiums are due early next year, pay them before December 31st.

Alimony, moving expenses, and student loan interest

Presently, these are deductible for AGI, but there is an income limit on the deduction for student loan interest. Both the House passed bill and the Senate Finance Committee bill eliminates these deductions but the full Senate may vote to preserve or limit them. To avoid the possibility of losing these deductions, pay them before December 31st. If the alimony deduction is eliminated, the payments to the recipient spouse will no longer be taxable or reduced if the deduction by the paying spouse is limited.

(2) Damage from hurricanes and other major storms

These are considered as casualty losses which are reduced by $100 for each item destroyed or damaged and total losses are reduced by 10% of AGI. For individuals, the loss is measured by the lesser of the taxpayer’s basis for the item or reduction in value (value before and after the loss-an appraisal may be required to substantiate the value for major items), less any reimbursement by insurance or other payments. A casualty loss cannot be deducted until the year in which the amount of any expected recovery (insurance or other payments is known). Thus, if a taxpayer has a casualty loss in 2017, they should request a reimbursement in 2017 so the deduction can be taken in 2017 since it may be eliminated starting in 2018. Due to the substantial losses from hurricanes Harvey, Maria, and Irma, taxpayers who had property destroyed in these areas, the IRS is allowing the casualty losses to be taken as a deduction FOR AGI not subject to the 10% reduction. Taxpayers under age 59 1⁄2 may make withdrawals from their tax deferred retirement accounts to pay for these losses. The withdrawal is taxable. but not subject to the 10% early withdrawal penalty.

Charitable Donations:

(a) For Hurricane Relief

Contributions are an itemized deduction. Cash donations are limited to 50% of AGI and long-term capital gain (held more than 12 months) property is limited to 30% of AGI unless basis is used, then it is 50%. But, the IRS has said they will allow for 2017 a deduction FOR AGI for donations designated for hurricane relief without being subject to the 50% and 30% limitations.

(b) From an IRA or other tax deferred retirement account

When a taxpayer reaches age 70 1⁄2, they must take an annual minimum distribution from their tax deferred retirement account. The law allows recipients to make charitable donations of the lesser of the minimum distribution or $100,000, from the required minimum distribution. The donation reduces the amount included in income. The taxpayer must designate to the plan administrator the amount, name and address of the charity and the donation must be made directly to the charity by the plan administrator. If the taxpayer receives the distribution and then makes a charitable donation, the amount received is included in income and the donation is considered an itemized deduction.(c) Household items. If a taxpayer may have household goods or clothing they no longer need, consider donating them to a qualified charitable organization. The deduction is the fair value on the date of the donation, measured by what the items would sell for in a second-hand store. If the value of the donation exceeds $5,000, an appraisal .must be obtained and attached to form 1040.

(3)

(d) Autos, trucks, motor cycles, boats, and similar items

If these are donated to a qualified charitable organization, the amount of the deduction depends on what the charity does with it. If the charity keeps it and uses it, the deduction is the lesser of basis or fair value on the date of the donation. If the charity sells the item, the deduction is the amount the charity sells it for.

(e) Investments

One way to increase your charitable contributions is to make donations of appreciated securities. The amount of the contribution is the fair value at the date of the gift. These are capital assets and the deduction is limited to 30% of AGI. A deduction up to 50% of AGI can be taken if basis instead of fair value is used. Any excess contributions over the limits can be carried over to future years. To make a donation of securities, contact your broker and designate the specific securities (name of company or mutual fund and number or shares or amount) and the name and address of the charity and person at the charity to whom they should be sent. Your broker will send the securities to the charity and give you an acknowledgement of the donation (name and address of the charity and person at the charity to whom they were sent,date sent, and value on date of the gift). You should receive a receipt from the charity with the same information.

Note: All deductions for property exceeding $500 must be entered on form 8283,”non-cash contributions” and attached to form 1040. For donations of property, whose value exceeds $5,000, an appraisal must be obtained and attached to form 1040. For donations of $500 or more, your receipt from the charity must state “no services or property was given by the charity in exchange for the contribution” If this statement is missing, and your return is audited, the IRS will disallow the deduction. Their authority to do so was upheld by the U.S. Tax Court several years ago.

Mortgage Interest:

(a) Loan obtained after October 13, 1987

Presently, a taxpayer who obtains such a loan to buy, construct, or improve a first or second home may deduct the interest paid on principal up to $1,000,000 ($500,000 for separate, single, or head of household). Loans for other purpose are considered home equity loans. A taxpayer may deduct the interest paid on the principal of these loans on the lesser of the fair market value of the home or $100,000 ($50,000 for separate, single, or head of household). Points paid on an original loan are deductible as interest but if they are paid on a re-financed loan, they must be deducted over the life of the loan. If your next mortgage payment is due next year, pay it before December 31 to get the interest deduction in 2017 if you expect your 2018 total itemized deductions to be less than the standard deduction which will be doubled under the new 2017 tax law.

(4)

(b) Loan obtained before October 14, 1987

For these loans, the$1,000,000 ($500,000 for separate, single, or head of household) limit does not apply (i.e., there is no limit on the interest deduction). However,the amount of the pre-October 14, 1987 loan reduces the $1,000,000 ($500,000 for separate, single, or head of household) on loans acquired after October 13, 1987 and the fair market value of the home for the amount of a home equity loan. For loans obtained after December 31,2017, the bill passed by the House limits the interest deduction to principal of $500,000 ($250,000 for separate, single, or head of household) but the Senate Finance Committee bill maintains the present amounts. Both the House and Senate Finance Committee bills eliminate the interest deduction on loans used to purchase a second home and home equity loans, In case the Senate goes along with the House bill, taxpayers planning to borrow more than $500,000 ($250,000 for separate, single, or head of household) to buy a primary residence, they should do so by December 31st or their mortgage interest deduction will be substantially less starting in 2018. The same is true if you are planning to purchase a second home, or take out a home equity loan.

By following these guidelines taxpayers can increase their itemized deductions in 2017 which will be very beneficial if you expect your 2018 itemized deductions to be less than the mew standard deduction for 2018.

Have questions? Contact Harold Goedde.

Your comments are always welcome.

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

Twitter LinkedIn 

Meet Tax Experts At TaxConnections...