With the new Tax Cuts & Jobs Act coming into effect in 2018, taxpayers are anxious to find where they will be impacted both positively and negatively. One such change has individuals facing a new limit placed on itemized deductions.
NOTE: The effects of the new Tax Act begin January 1, 2018. Your tax filings for 2017 will not reflect these changes.
Before the changes are effective, individuals are permitted to claim the following types of taxes as itemized deductions, even if they were not business related:
- State, Local, and Foreign real property taxes;
- State and Local personal property taxes; and
- State, local and foreign income, war profits, and excess profits taxes.
Taxpayers can elect to deduct state and local general sales taxes in lieu of the itemized deduction for state and local income taxes.
Tax deduction cuts. For tax years 2018 through 2025, the Act limits the deduction for taxes paid by individual taxpayers in the following ways:
…It limits the aggregate deductions for state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for married individuals filing separately). *Important exceptions apply. Contact Wicks Emmett LLP for more information.
…It completely eliminates the deduction for foreign real property taxes unless they are paid or accrued in carrying on a trade or business or in any activity engaged in for profit.
To prevent avoidance of the $10,000 deduction limit by prepayment in 2017 of future taxes, the Act treats any amount paid in 2017 for a state or local tax imposed for a tax year beginning in 2018 as paid on the last day of the 2018 tax year. So an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the $10,000 aggregate limitation.
Please call us at Wicks Emmett LLP if you wish to discuss how these or any of the many other changes in the Act could affect your particular tax situation and the planning steps you might consider in response to them.