The tax reform bill that became law last December made extensive changes to the tax code, a few of which will even take effect for the 2017 tax year. Of the many deductions and credits that were boosted, two in particular stand out -- albeit for different reasons.
No. 1: The medical expense deduction
Early drafts of the Tax Cuts and Jobs Act proposed repealing the medical expense deduction entirely, but in the end, Congress not only kept this tax break, but enhanced it. However, the change only applies to 2017 and 2018, so you'll need to move fast to claim your share.
Unlike most tax deductions, the medical expense deduction is reduced by a percentage of your adjusted gross income (AGI) for the year. Here's how that works: First, you calculate your AGI by following the instructions on the first page of Form 1040, then you take a given percentage of that number and subtract it from your total medical expenses for the year. Whatever's left over is the amount you can claim for the medical expense deduction.
Tax reform boosted this deduction by reducing the AGI percentage you subtract to 7.5% from 10% (again, this is for 2017 and 2018 only). In other words, you can claim medical expenses in excess of 7.5% of your AGI. That will allow many taxpayers to claim larger deductions for their medical expenses.
For example, say your AGI for 2017 was $80,000 and you had $10,000 in medical expenses. Using the old AGI limit of 10%, you would subtract 10% of $80,000, or $8,000, from your $10,000 in medical expenses to get a result of $2,000 -- and that would be all you could claim as a medical expense deduction.
With the new AGI limit, you'll subtract only 7.5% of your AGI, which in this example is $6,000. That means you'd be able to claim $4,000 in medical expenses instead of $2,000, thereby doubling your medical expense deduction for the year.
Note that the medical expense deduction is an itemized deduction, meaning that you have to turn down the standard deduction to claim it. Because the standard deduction has nearly doubled beginning in 2018, most taxpayers won't want to itemize beginning with the current tax year -- which is all the more reason to grab the medical expense deduction for the 2017 tax year if you can save enough money through itemized deductions to make it worthwhile.
No. 2: The child tax credit
Tax credits are even better than tax deductions. A tax credit directly reduces your tax bill, while a deduction is subtracted from your taxable income, which means your actual savings only amount to a fraction of the deduction. That's why the dramatic increase in the child tax credit could make an equally dramatic improvement in your tax bill starting with your 2018 return.
Until now, the child tax credit was limited to $1,000 per qualifying child under the age of 17. The credit was refundable for taxpayers who had earned at least $3,000 in income for the year, which means it could not only wipe out your tax bill, but get you a refund for whatever credit amount may be left over. Finally, the credit was phased out for high-income taxpayers -- in 2017, the phaseout begins at $75,000 of modified AGI (MAGI) for single filers and $110,000 for joint filers (MAGI is simply your AGI with certain deductions added back in; for most taxpayers, it will be identical to AGI).
The phaseout reduced your credit by $50 for each $1,000 in MAGI over the threshold amount. For example, if you were a single filer and your MAGI for the year was $115,000, you would reduce your credit by $50 times 40, or $2,000.
Starting with the 2018 tax year, the credit will double from $1,000 per child to $2,000 per child. The refundable portion of the credit will now be limited to $1,400, meaning that it can't be used to generate more than a $1,400 refund (any excess credit will simply be lost). The earned income requirement to make this credit refundable will be reduced to $2,500, and the modified AGI threshold to claim the full credit will increase to $200,000 for single filers and $400,000 for joint filers.
All of these changes are set to expire at the end of 2025 unless Congress chooses to renew them.
Finally, there's a new family tax credit for taxpayers with dependents aged 17 and older. The non-child dependents credit is $500 for any dependent too old to qualify for the child tax credit. This credit is nonrefundable, so it can't be used to create or increase a refund. Much like the changes to the child tax credit, this credit will expire at the end of 2025 unless it's renewed.
These two tax breaks aren't the only improvements that tax reform introduced, but they're definitely among the most important. The fact that the medical expense deduction improvement is retroactive nicely counterbalances the fact that few taxpayers will want to itemize deductions starting in 2018. And the child tax credit and non-child dependents credit will provide a helpful tax break for nearly every taxpayer with dependents -- so if you qualify for that set of credits, you'll definitely want to grab them starting with your 2018 return.
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