Mehanna CPAs & Advisors | 199a deduction

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Top Tax Issues

he GOP tax plan claims that middle-class families in our nation will get more tax breaks in 2018.

However, there are many controversies about the newly passed Tax Cuts and Jobs Act (TCJA). Well, every new change has some good and bad sides. In this article, I will show you the good sides of the new tax bill and its impact on the people in our nation.

1. Deduction on the mortgage interest rate

The new homebuyers (Who took out a mortgage loan on or after Dec. 15, 2017) will get up to $750,000 and $375,000 (For married couples filing separate returns) deducted mortgage interest on their newly purchased home.

According to the previous Tax Law, the limit was higher – $1 million and $500,000.

Note: Current homeowners (Who took out a mortgage loan on or after Dec. 15, 2017) would not be affected by the new tax rule.

As per the new Tax Law, interest on home equity loan is not any more deductible. However, in the past, taxpayers got the deduction on the home equity loan up to $100,000 or $50,000 for couples (Filing separately).

Home equity lines of credit (HELOCs) is also no longer deductible.

Previously, the taxpayer used to get the deduction on HELOCs up to $100,000 or $50,000 for couples (Filing separately).

Note: The New Tax Law will expire on 1st January 2026.

Remember, you will be able to claim the greater mortgage interest deduction or the deductions for other home equity debt interest only on your 2017 tax return, not anymore.

2. The new Child Tax Credit Act

The Child Tax Credit Act has planned to help families with dependents. Previously, it offered the money back to the taxpayers for each qualifying child in the household. The age of the child had to be under 17, which is still the same. However, higher earning families were not included in this benefit. The credit phase-out was $75,000 (AGI) for single filers and $110,000 for couples filing jointly.

Under the new Tax Cuts and Jobs Act (TCJA):
  1. The Child Tax Credit Act is increasing from $1,000 to $2,000 per qualifying child.
  2. The income threshold is increasing to $200,000 for single filers and $400,000 for married couples filing jointly.

Note:

  •  The child should have a valid SSN to claim the refundable and nonrefundable credit.
  • The age cut-off will be same (Under age 17)
  • The child should be related to the taxpayer. For example, son, daughter, grandchild, etc.
  • The child should live in the taxpayer’s home for more than half the year.
  • The child should not be able to provide more than half of his/her own financial support.
  • Special rules are applicable for parents who are divorced or legally separated.
  • The new Child Tax Credit will expire on December 31, 2025.

3. The medical-expense deduction

The new tax law is providing medical expenses deduction for middle-class people in the USA.

As per the old rule, the medical expenses for the year had to surpass 10% of a person’s AGI. Now the threshold is 7.5%.

  1. At present, if the medical cost exceeds 7.5% of a person’s adjusted gross income (AGI), then the person will get medical expenses deduction.
  2. Qualified costs are still the same (diagnosis cost, cure, mitigation, treatment, or prevention of disease, including dental costs).
  3. The medical costs should be related to the taxpayer, the taxpayer’s spouse, or dependent.
  4. Taxpayers can deduct his/her’s medical expenses paid in the same tax year as the return.

Note: This change will expire after the current tax year 2018.

4. Education Tax Benefits

As per the new tax Cuts and Jobs Act, there are slight changes in the tax deductions for people who are paying their student loan and saving for education.

As per the prior tax rule, the income from the cancellation of debt was subject to tax.

The new rule allows certain qualifying students to exclude cancellation of student loan debt from their income.

If a student wants to qualify for it, then:

“the loan must have a provision that states that part of the debt will be canceled if the student works:

  • For a certain period of time,
  • In certain professions, and
  • For any of a broad class of employers.”

As per the new provision, the student loan debt forgiveness due to death or permanent and total disability should be excludable from the income.

However, most of the old rules are same.

  1. American opportunity credit (AOC) is same.
  2. Lifetime learning credit is same.
  3. Nontaxable scholarship and grant rules are same as the old rule.
  4. Tuition and fees deduction is eliminated. It is no longer available.
  5. Education exception to early distribution penalty for IRAs is same as before.
  6. Education savings bond exclusion is same as before.
  7. Exclusion for employer-provided education assistance is same as the earlier rule.
  8. Business deduction for work-related education has eliminated for employees.
  9. Student loan interest deduction will be the same.
  10. Exclusion for student loan cancellation is modified.

Lastly, though the GOP claims that the new tax law is offering great tax cuts for the middle-class families and it is simplifying the tax process, yet there are many controversies.

Critics are saying that the new tax law is temporary; most personal tax provisions in the bill will expire by 2026.

Thus, the middle-class taxpayers will experience a tax hike after a certain time due to the effect of inflation.

Tax law modifies time to time; it can be difficult to understand how the tax reform changes will affect you. So, it is recommended to use a tax reform calculator or seek advice from a tax professional.

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