The Tax Cuts and Jobs Act includes several changes to the individual taxpayer’s itemized deductions for the tax years beginning 2018 and ending 2025. The new tax act includes a large increase to the standard deduction, from $6,350 for a single filer to $12,000 and from $12,700 for married filing joint filers to $24,000. With the changes included below, many tax filers may find they will be claiming the standard deduction rather than itemizing. Below is a summary of changes:
Favorable Changes:
Changes to the deduction for medical and dental expenses: In recent years, if you were under the age of 65, your medical and dental expense deduction had to meet a minimum of 10% of your adjusted gross income, before any deductions could be taken. For example, if you make $100,000 a year, you could not deduct medical and dental expenses until they exceeded $10,000. This threshold has been decreased back to 7.5% (For those 65 and older the 7.5% remains consistent).
Changes to the charitable contribution deduction: The charitable contribution limitation was set at 50% of your adjusted gross income. Which means if you made $100,000 you could not deduct more than $50,000 of charitable contributions. This limit has been increased to 60%.
Elimination of the limit on itemized deductions: In past years, as your income reached certain levels, certain itemized deductions began to phase out. The income limit began at $287,650. This limitation has been removed. All remaining itemized deductions will now be allowable in full.
Unfavorable Changes:
Changes to state and local tax deductions: In the past, taxpayers were allowed to deduct all state and local taxes paid, including state income taxes, property taxes, DMV fees, etc. This deduction has been limited to $10,000 per year. If you live in a high income or high property tax state, this limitation will impact you.
Changes to the mortgage interest deduction: In previous years, the mortgage interest deduction was limited to the debt on the first $1,000,000 of home acquisition indebtedness. This limitation has decreased to $750,000 for loans originating after December 15, 2017. Loans originated before December 15, 2017 will still be eligible for the mortgage interest deduction up to $1,000,000.
Elimination of the home equity loan interest deduction: Previously, taxpayers were allowed to deduct interest on up to $100,000 on home equity loan indebtedness, regardless of what the funds were used for. This deduction has been eliminated. The interest may still be deductible if the proceeds were used to buy, build, or substantially improve the taxpayer’s home.
Elimination of the miscellaneous itemized deductions. These deductions were all previously allowable to the extent the deductions exceeded 2% of the taxpayers adjusted gross income. The following deductions have been eliminated through the new tax act:
a. Employee business deductions (unreimbursed expenses paid by a W-2 employee)
b. Investment expenses: advisory and management fees
c. Tax preparation fees
d. Legal fees related to tax matters
e. Hobby expenses
Gambling losses and investment interest expense are still deductible.
Changes to personal casualty loss deductions: Under previous laws, casualty losses (including fire damage, theft, flood, storm, other casualty) were deductible to the extent that they exceeded $100 plus 10% of your adjusted gross income. In our example, your casualty loss (unreimbursed from insurance) would have to exceed $10,100 before you could take a deduction. Each $1 over $10,100 would then be deductible. Under the new tax law, only casualty losses in federal disaster areas are deductible.
Navigating the impact of the new tax law can be challenging. At Kieckhafer Schiffer LLP we have tax professionals ready to help ensure your tax returns are accurate and providing you the most benefit possible. Contact your KS-LLP professional to learn more about understanding the new tax laws.