This article was last updated on December 20
[Trump Tax Reforms and impact to Itemized Deductions] As part of the GOP tax reform bill to support President Trump’s tax reform agenda there are going to several changes to which deductions can be taken in 2018 and beyond. The biggest change is that the Personal exemption is being fully eliminated in 2018 (until 2025, unless extended by Congress then). This $4,050 exemption in 2018 which can be taken for yourself, your spouse, and your eligible dependents will be scrapped meaning that single parents or families with lots of dependents could see a higher tax bill as a result.
Several itemized deductions like SALT and alimony payments are also being cut back or eliminated entirely. This is supposed to be offset by the doubling of the standard deduction and increased Child Tax Credit (CTC). The idea is that by increasing the standard deduction and removing several deductions, tax payers will not need to itemize their deduction in their 2018-19 tax returns thereby making the tax filing process simpler and smoother.
[Updated for latest levels] Legislation a few years ago raised the threshold for those required to pay higher tax rates and also included provisions to restart limits on certain itemized deductions (Pease) and personal exemptions (PEP) that were phased out and eventually removed as part of the turn of the century Bush-era tax cuts. PEP and Pease were the two provisions in the tax code that increased taxable income for high-income earners. PEP is the phaseout of the personal exemption based on income level and Pease (named after former Senator Donald Pease) reduces the value of most itemized deductions once a taxpayer’s adjusted gross income (AGI) reaches a certain point.
But the income thresholds (limits) for these provisions is much lower than the higher end federal tax bracket income thresholds and so will apply to a lot more people. These income limits are tied to official CPI measures and hence are adjusted for inflation every year.
The re-instituted Pease phase-out limitation on itemized deductions cuts the amount of deductions you can take by 3% of adjusted gross income (AGI) above the specified income thresholds shown in the table below, but you cannot lose more than 80% of the affected itemized deductions. This means that tax payers whose AGI is greater than the specified income thresholds won’t be able to take all of the deductions associated with items like home mortgage interest, charitable donations and state/local income tax payments. While a lot of itemized deductions are affected by the itemized deduction limitation, some such as medical expenses, investment interest and gambling losses are not subject to the limit.
|Filing Status||Adjusted gross income (AGI) Pease Limitation for Claiming Itemized Deductions|
|Married Filing/Joint Return||$320,000||$313,800|
|Heads of Households||$293,350||$287,650|
|Married Individuals Filing Separate Returns||$160,000||$156,900|
For an example of the above consider a married couple with income of $400,000 who file their tax return with $50,000 in itemized deductions. This couple is $100,000+ above the itemized deduction AGI threshold meaning that their allowed deductions would be reduced —potentially adding to their tax liability by about $1,000.
You are generally allowed to deduct the personal exemption for yourself, your spouse, and your eligible dependents. The personal exemption for 2017 and 2018 is $4,050. But with the new Personal Exemption Phase-out (PEP) the value of each personal exemption is reduced from its full value by 2 percent for each $2,500 above the specified income thresholds in the following table. It phases out the ability to claim the personal exemption completely at $389,200 for single filers and at $442,500 for married couples filing jointly.
|Filing Status||Annual Income (AGI) Limit Range for Personal Exemption Phase-out|
|Single Filer||$259,400 to $381,900||$261,500 to $384,000||$266,700 to $389,200|
|Married Filing/Joint Return||$311,300 to $433,800||$313,800 to $436,300||$320,000 to $442,500|
|Heads of Households||$285,350 to $407,850||$287,650 to $410,150||$293,350 to $415,850|
|Married Individuals Filing Separate Returns||$155,650 to $216,900||$156,900 to $218,150||$160,000 to $221,250|
What This Means For You
If your AGI is below the above thresholds then you should see no impact from the above changes and can claim your personal exemptions and itemized deductions as you normally would. Higher income taxpayers though will face reductions and likely see higher tax bills as the value of their personal exemptions and itemized deductions are reduced.