Let’s start with the easy adjustments that pretty much occur every year. Many federal tax provisions are indexed for inflation, which means they can increase or decrease automatically as one year rolls over into the next. Others change when Congress steps in to adjust them to keep pace with the current economic climate. In either case, these are the basic adjustments for 2017.
President Trump’s sweeping tax changes regarding tax brackets and the standard deduction had not yet happened by mid-year. Tax brackets remain the same at 10, 15, 25, 28, 33, 35 and 39.6 percent. The only really significant change here relates to who falls into that 39.6 percent tax bracket. As of 2017, the income limits increase from $415,050 to $418,400 for single taxpayers, and from $466,950 to $470,700 for married taxpayers who file joint returns. Taxpayers with incomes over these thresholds fall into the current highest tax bracket. The limits for the other tax brackets remain in the $50 range thanks to a modest inflation rate, and $100 for those who are married and filing jointly.
Standard deduction amounts increase marginally, too — literally just $50 in most cases. They’re set at $6,350 for single taxpayers and married taxpayers filing separate returns, at $12,700 for those who are married and filing jointly, and at $9,350 for those who qualify as head of household.
The personal exemption amount stays stuck at $4,050 in 2017, although the income thresholds for qualifying for being able to take it have changed. The phase-out begins at adjusted gross incomes of $261,500 in 2017 — if you have this much income, you can’t claim the entire exemption. It’s eliminated entirely for those with AGIs of $384,000 or more.
02The Obamacare Tax Penalty
There’s been some big news with regard to that Obamacare tax penalty that hits taxpayers who decline to carry health insurance. Yes, the Affordable Care Act is still in effect. The Trump administration has not yet changed that. But one of Trump’s first official acts as president was to sign an executive order that began whittling away at its tax impact on Americans.
It used to be that taxpayers had to indicate on line 61 of their 1040 tax returns whether they had insurance during the tax year or if they qualified for an exemption. The IRS intended to automatically reject returns received in 2017 if this line was left blank. In other words, addressing it was mandatory.
That’s not going to happen now thanks to President Trump’s executive order directing that government agencies “exercise authority and discretion available to them to reduce potential burden …” The IRS responded by issuing a statement that it would not automatically reject returns with blank lines 61, although it cautioned that those who don’t carry insurance still owe the penalty. The big difference here is that the IRS is going to have to work a good bit harder to figure out who had insurance and who didn’t. Completing line 61 is now “optional.”
03The Itemized Medical Expense Deduction Threshold
Now for the bad news. You’ve historically been able to claim a tax deduction for medical expenses you must pay, including health insurance premiums, if you elect to itemize on your tax return. At one point, you could deduct expenses that exceed 7.5 percent of your AGI, then the Affordable Care Act changed that to 10 percent for everyone except taxpayers age 65 or older. They remained at the 7.5 percent rate through the end of 2016. Beyond that time, they would also be subject to the 10 percent rate.
Congress floated House Bill 3590 in late 2016 in an effort to prevent this. Additionally, H.R 3590 would have returned everyone else to the 7.5 percent rate as well. Alas, the bill passed the House but not the Senate. As of 2017, everyone is subject to that 10 percent threshold.
04The Mortgage Insurance Premium Deduction
It used to be that you could claim a tax deduction for mortgage insurance premiums if you itemized, but no more. That deduction has been eliminated as of 2017. The Protecting Americans from Tax Hikes Act extended it for just one more year in 2015, so it’s now expired. Congress can still take action to renew it, however, so stand by.
05The Above-the-Line Tuition and Fees Deduction
The tuition and fees deduction is another that expired at the end of 2016, and this was a particularly nice one. You didn’t have to itemize to claim it — it came off your taxable income as an adjustment to income “above the line” on the first page of your 1040 tax return. You could take it and take the standard deduction or itemize other deductions. It helped to determine your AGI, which several tax break phase-outs are subject to.
Unfortunately, it’s been eliminated beginning in 2017. You can no longer take a deduction for tuition or qualified fees you pay on behalf of yourself or your dependents. The American Opportunity Tax Credit and the Lifetime Learning Tax Credit are still available but are subject to phase-out limits and some other restrictions that prevent all taxpayers from claiming them. Everyone could claim the tuition and fees deduction, however, even if they didn’t qualify for the credits – but not anymore.
06Discharge of Foreclosure Indebtedness
Another big change is the elimination of the tax code provision that allowed taxpayers to discharge indebtedness related to home foreclosure. Foreclosure has historically been treated as a taxable event. Taxpayers are obligated to report and pay taxes on forgiven debt, so if foreclosure wipes out your $100,000 mortgage, you would have to report that amount as income.
The qualified principal residence indebtedness exclusion prevented this from happening. It permitted taxpayers to exclude up to $2 million in forgiven debt based on the extent of their insolvency just before foreclosure — the extent by which their overall indebtedness exceeded the overall value of their assets.
As of mid-year 2017, this tax break is gone, too, at least for the most part. If you entered into a binding written foreclosure agreement in 2016, you can still claim the exclusion for this amount in 2017, but not thereafter.
07The Earned Income Tax Credit
Relax — the earned income tax credit has not been eliminated, although there are a couple of changes here as well. The PATH Act prevents the IRS from sending out refunds to anyone claiming this tax credit or the Additional Child Tax Credit until February 15 each year beginning in 2017. The idea is that this gives the IRS some time to investigate fraudulent claims for these credits. You may have already come up against this change if you claimed either of them for the 2016 tax year and you filed your return as soon as possible only to wait and wait for your refund. This delay is not a one-time event. The PATH Act requires it going forward beginning January 1, 2017.
The good news is that the maximum EITC goes up to $6,318 in 2017 for married taxpayers with three or more qualifying children if they file a joint return, and other eligible taxpayers will see a slight increase in 2017 as well.
Tax Law Changes That Take Effect in 2017
Some Significant Tax Law Changes Take Effect in 2017
You might not think of taxation as being a shifting and volatile issue — the rules are the rules, after all, and they seem to have been in place for an eternity for those of us who have been paying taxes for a while. But they do change periodically, and sometimes they do it in a flurry. This was the case at the end of 2016, and some laws are still in limbo as of 2017.