Several IRS tax deductions came to an end due to the tax reform process but the deduction for state and local taxes made it through. The property tax deduction specifically, survived which means property taxes are still deductible.
The Tax Cuts and Jobs Act, however, created a huge change to the deduction for state and local taxes limiting the amount eligible for deduction. The biggest change in the tax code is making taxpayers pay property taxes but won’t be able to take advantage of the deduction.
In this case, here’s what the American Taxpayers needs to know about tax law changes on the state and local taxes (SALT) before purchasing a property.
1. Revised SALT deduction
Also known as the SALT deduction, the deduction for state and local states has been very profitable for a lot of taxpayers. Residents of high-tax states such as New York, New Jersey, and California particularly benefits to it. The state and local property taxes paid by taxpayers can be deducted as well as any of the state and local income taxes or sales taxes. It also became one of the most controversial parts of the tax reform process.
Replacing the whole deduction became the main goal of many Republicans but eventually, the SALT deduction remained standing. An annual cap of $10,000, however, was placed by the Tax Cuts and Jobs Act to the deduction.
Taxpayers living in high-taxes areas got very disappointed after finding out the change. New York, for example, saved more than $21,000 because of the average SALT deduction in a recent tax year. An average New Yorker claiming SALT deduction would, therefore, have their deductible amount cut by more than half.
2. Higher Standard Deduction
In order to take advantage of the SALT deduction, a taxpayer must do an itemized deduction when filing their tax return. The Tax Cuts and Jobs Act also eliminated many types of itemizable deductions in the which means it can be hard for people to justify their itemization. It is expected that only about 5% of taxpayers will itemize their deductions starting in 2018. For quite some time, only about 30% of taxpayers did an itemize deductions in their tax return every tax year which means five out of six people who were used to itemize their deductions will no longer be able to do it this year.
Although property taxes are still deductible in 2018 and beyond, the Tax Cuts and Jobs Act severely limited the deduction hurting taxpayers who live in the states that need it the most. Considering this fact as well as the increased of the standard deduction, it’s safe to say that a lot of people will see itemizing not worthwhile. A small percentage of taxpayers will only be able to include their property taxes for deduction in 2018.
3. Repealed Personal Casualty Losses Deduction
Taxpayers suffering from an economic loss because of a natural disaster are eligible for casualty loss deduction before tax reform. In order to be considered a casualty loss, the property must be damaged, destructed, or got lost due to any sudden unexpected or strange event. The most common unusual events are a hurricane, flood, tornado, fire, earthquake or even volcanic eruption. Normal wear and tear or damage that happened over time such as termite damage are not included in the casualty loss.
The tax reform removed the deduction for personal casualty losses except for those related to a federal disaster. Taxpayers will suffer is the storm or event isn’t classified as a federal disaster. Although homeowner’s insurance can take care of some of the cost, they will more likely ignore the rest of your problem. Typical homeowner’s insurance does not really cover damage from rain or flooding.
4. Home Sale Gain Exclusion Rules Is Unchanged
Here's a bit of a good news for you. The TCJA preserved the significant break allowing taxpayers to potentially exclude up to $250, 000 of gain from a qualified home sale in their federal income tax. For married filing jointly, the limit is $500,000. The House and Senate bills may have been proposed to include this tax saving deduction in the restrictions but the final bill left it untouched.
Bear in mind that these changes aren’t permanent because most of them are only valid for the tax years 2018 through 2025 so make sure you create your own strategic plan for your properties. Always check if your withholding is correct especially if you’re one of those who traditionally benefited from the tax-favored provision for homeowners.
