How Will the New Tax Law Affect Your 2017 Taxes?

President Trump signed the new tax reform bill into law on December 22, 2017. The biggest rewrite of the tax code in almost thirty years has left taxpayers confused about how it affects the taxes they will file for 2017. Most of the changes will take effect in 2018 for taxes you will file next year in 2019. Take a deep breath, as you will have a whole year, well 10 more months (who’s counting so soon?) to prepare.

The New Tax Reform Law will affect your 2017 taxes minimally. The biggest effect for most taxpayers has been the delayed IRS opening. For some, the changes cannot be effective soon enough. For others, the confusion about how the changes will affect their individual tax situation has caused much apprehension and fear. Relax. Although the IRS expects the tax law to simplify taxes for millions, the net tax difference will be minimal for most taxpayers filing individual returns. The changes will adversely affect higher income earners and people living in states with higher property taxes more. Please see below for how the new tax reform law will affect your 2017 taxes.

Obamacare Penalty in 2017

For 2017 and 2018, the individual mandate for Obamacare stands. The IRS will be assessing the penalty for not carrying health insurance for the full year, if you do not qualify for an exemption. Exemptions to the penalty include:

  1. low income – if your income is below the filing threshold, that is, you do not have to file a tax return (Even if you decide to file a return, for example, to get a refund, you would still qualify for the exemption.);
  2. affordability – if the cost of the minimum premium insurance payment is more than 8.16% of your household income;
  3. short coverage gap – if you went without coverage for less than three consecutive months during the tax year; or
  4. hardships – If you experienced domestic violence, death of a close family member, eviction, homelessness, unpaid medical expenses, or foreclosure that prevented you from purchasing healthcare insurance coverage.

There are additional less common exemptions including: religious conscience, health care sharing ministry, Indian tribes, nonresident immigrants, and incarceration. Last year, the IRS accepted returns from people who failed to answer the questions regarding health care coverage for 2016 and followed up with them later. This year if people fail to respond, the IRS will reject their returns.

Beginning in 2019 (for taxes you will file in 2020), the new tax law repeals the individual mandate. This means that in 2019, if you do not have health insurance for the entire year, you will no longer have to pay the Affordable Care Act penalty (individual mandate), if the law remains unchanged. Without this penalty, the CBO approximates by 2027 that 13 million Americans will be uninsured.

Tax Deduction for Medical and Dental Expenses

For people that itemize their deductions, you can deduct unreimbursed medical and dental expenses, not covered by health insurance, that exceed 7.5% of your adjusted gross income (AGI). The new tax reform dropped the percentage down to 7.5% from 10% for 2017 and 2018. For 2019, the percentage of your adjusted gross income that medical and dental expenses need to exceed increases back to 10%.

This was one of the few changes that was retroactive back to 2017, affecting the taxes you are filing now. For example, if your AGI for 2017 was $40,000, you can deduct unreimbursed qualifying medical and dental expenses exceeding $3,000 (a drop from $4,000, as set by the 10% requirement under the old law).

Deduction for the Cost of Business Property

The first year property is purchased or placed into service in your business, you can deduct up to 100% of the costs. Under the new tax reform, one of the huge changes is the property can be deducted even if it was purchased used. This is one area of the law that reaches back to 2017, allowing property purchased or placed into service after September 27, 2017 to be deducted.

Personal Casualty Loss Deductions

This tax deduction for casualty losses is facing some major changes under the new tax reform. Typically, this deduction allows taxpayers to take a deduction for losses due to unreimbursed personal losses caused by fire, storms, other casualties, or theft. Beginning in 2018, the deduction is being eliminated except for losses incurred due to a federally declared disaster.

Another major change beginning in 2018 is a net disaster loss can be taken in addition to the standard deduction and does not need to be itemized. This, also, effects how Alternative Minimum Tax is calculated, if the taxpayer suffered a loss due to a federally declared disaster. The net disaster loss is calculated by subtracting losses for 2016 federally declared disasters from personal casualty gains, e.g., insurance reimbursements and other types of assistance. Finally, the 10% of adjusted gross income limitation for casualty losses has been eliminated, and the limitation of $100 has been increased to $500.

Special rules apply to losses due to federally declared disasters. If you have suffered a loss due to a federally declared disaster in 2016 or want help understanding how the other tax changes affect your taxes, schedule an appointment today with the tax preparation professionals at Gudorf Tax Group to determine if it is in your best interest to amend your previous years’ tax returns due to the recent changes. Our professionals are here to help you navigate the new tax reform with confidence.