The New Tax Cuts and Jobs Act came as a surprise for countless Americans. Following the same tax code for around three decades, a change in the tax laws was welcomed. Following our previous two blogs where we discussed the changes in tax rates, the standard deduction, personal exemption, the increase in child tax credit, and the alterations in annual adjustments, in this writeup we will be discussing about how the 2019 tax changes have affected the education tax brackets, savings plans, mortgage interest, charitable contributions, medical expenses, and the SALT deduction.
Let’s breakdown each one-by-one:
Education Tax Breaks Remain, Tuition Fee Deductions May Not
Tuition fee deductions that were made accessible under the Bipartisan Budget Act of 2018 can no longer be availed. However, the decision may be reviewed by Congress to make the tuition and fees tax deductions obtainable for the current tax year as well. On the other hand, the American Opportunity Credit and the Lifetime Learning Credit, the two tax credits structured to reduce tax bills of people who were paying for their college education was included in the New Tax Law as-is. While the former applies to only four initial years of a degree or certificate program, the latter can be applied to the entire tuition and fees.
The 529 Savings Plan Enhanced
The revised tax code has left the two tax-advantaged college savings accounts- the Coverdell Education Savings Account (ESA ) and 529 savings plan, unscathed. These savings accounts encourage college savings to grow tax-deferred allowing parents/guardians to invest in the child’s tuition fees, books, uniforms, and other educational expenses; and, withdraw them tax-free for permitted expenses. Where the ESA allows withdrawal at any level of education and not just college, the 529 savings plan which previously allowed withdrawals only for college fees was altered to do the same.
Buying A Home and Planning to Seek Tax Break? Think Again!
If your plan was to buy a home soon and avail of a tax break, you might need to rethink your decision. The New Tax Law has introduced a couple of substantial modifications in the mortgage interest deduction. Previously, taxpayers could deduct the mortgage interest on qualified residence loans with a principal limit of up to $1000,000. The 2019 tax changes have revised and reduced the limit to $75,000.
Taxpayers must also keep in mind that the ‘qualified residence’ as stated above excludes properties bought for investment purposes. This implies that the property should be the buyer's primary or second home and the changes apply for all loans issued after 2017.
Qualified Charities? Okay!
Paying for charity is great. You are helping someone needy and in return, you take home the satisfaction that comes from doing something good. While being a good samaritan never goes out of fashion, you can also take a tax deduction on the amount you pay for charities. However, it is essential to note here that only qualified charities allow taxpayers to take a deduction. IRS recognizes certain charities as tax-exempt, such as fire squads, non-profit healthcare, and education institutions, etc. Also, frequent charitable taxpayers can now deduct 60% instead of 50% of their Adjusted Gross Income.
The threshold for Medical Expense Deduction Lowered
Medical expenses form a huge part of our expenses. Most Americans agree that they pay a majority of their medical bills directly out of their pockets, and it is a huge deal when these medical expenses exhaust most part of their income. However, the good news is, seeking medical expense deduction can reduce your taxable income, which means you end up paying fewer taxes. The threshold for medical expense deduction, under the TCJA, has been dropped to 7.5% compared to the prior limit which exceeded 10% of the AGI. Taxpayers can go through the list of medical procedures, conditions, products, and treatments that qualify for a tax deduction.
No More SALT Advantage
The biggest bad news for Americans, especially for those staying in high-tax states like NY and New Jersey, is the tax reform that lowered the SALT deduction limit to $10,000. Where $10,000 may be a lot for any other American, those already seeking a deduction exceeding $10,000 may not be delighted.
Up until now, the SALT had been benefitting taxpayers all across the 50 states. SALT (State and Local Taxes) provides taxpayers the option to deduct real estate taxes and sales/income tax paid to state and local governments. Americans, whether they belong to the low, medium, or high income earning groups or living in rural, suburban, or urban areas benefit from the State and Local tax deduction.
However, with the revised tax law, a large chunk of the taxpaying Americans will no longer be able to benefit from the state and local tax deduction.