Itemized Deductions
Itemized Deductions
With the passage of the Tax Cuts and Jobs Act (TCJA), the number of individuals who will be itemizing deductions on their personal tax return will significantly decrease.
The standard deduction has almost doubled over the 2017 amount, resulting in more individuals claiming the standard deduction. But for those who will itemize, they will see significant changes pertaining to the types, and amounts, of the deductions being claimed on their personal tax returns.
Medical Expenses
For starters, for tax years 2017 and 2018 the “floor” for deducting medical and dental expenses has decreased to 7.5% of adjusted gross income for all taxpayers, not just those ages 65 and older. The “floor” is a percentage of an individual’s adjusted gross income (“AGI”), and only qualified medical expenses incurred above that floor are deductible. To illustrate: if an individual’s AGI is $100,000, the first $7,500 (7.5% x $100,000) of medical expenses are not eligible to be deducted. Before, if you were under the age of 65 the floor was 10%, but for 2017 and 2018, all taxpayers will be subject to the 7.5% floor. However, after the 2018 tax year these tax provisions will expire and the 10%-of-AGI limitation will apply to all taxpayers.
State and Local Taxes
Additionally, the amount of state and local taxes (SALT) that can be deducted as an individual itemized deduction is now capped at $10,000. This includes any combination of state and local sales, income, personal property, and real estate taxes. For tax years prior to 2018, there was no cap. This new provision alone will reduce the number of individuals who itemize, particularly for those who live in high income/property tax states, as well as those who own pass-through businesses.
Home Mortgage Interest
Furthermore, the deduction for home mortgage interest is changing. Acquisition indebtedness subject to the mortgage interest deduction is now capped at $750,000 for new mortgages taken out after December 15, 2017 ($1,000,000 before). Thus, only the interest on the first $750,000 of acquisition indebtedness is eligible to be deducted. Note that mortgages taken out prior to December 15, 2017 are grandfathered in, and interest on $1,000,000 is eligible to be deducted. Also, there is no longer a deduction for interest on “home equity indebtedness,” i.e., debt secured by a primary residence that is not used to acquire, build, or substantially improve the primary residence.
Charitable Contributions
Charitable contributions remain deductible, but with a few changes. The total annual deduction for cash donations to public charities was previously limited to 50% of a taxpayer’s AGI; that has now increased to 60%. In addition, donations given in exchange for exclusive seating rights at collegiate athletic events are no longer allowed as a charitable deduction. Prior to the new tax law, these were 80% deductible. Finally, the charitable mileage rate will remain at 14 cents per mile.
Casualty Loss
The deduction for casualty and theft losses is repealed for tax years 2018 through 2025 unless the loss arises from a federal disaster declared by the President.
Miscellaneous Deductions
Finally, all miscellaneous deductions are eliminated for tax years 2018 through 2025. The most common miscellaneous deductions are unreimbursed employee expenses, uniforms, tools, tax preparation fees, dues, and job search expenses. Unreimbursed employee expenses include unreimbursed travel (hotel, meals), and mileage. For those who work out of town, this will be a major change to their itemized deductions.
For those who do itemize, there will no longer be a phase-out based on income. In other words, the total amount of itemized deductions will not be reduced for high-income taxpayers beginning in 2018.
Please note that unless otherwise stated, all changes noted above are temporary and will expire December 31, 2025.
As you can see, itemized deductions have been drastically changed under the TCJA. Your WK advisor to is ready to help you determine how these changes may impact your 2018 tax return.