If you are accustomed to itemizing deductions on your income tax returns, you may have some surprises in store for you when you prepare to file your 2018 tax returns. For many taxpayers, the higher standard deduction allowance granted by the Tax Cuts and Jobs Act (TCJA) will make it unnecessary to itemize deductions. The new tax law almost doubled the standard deduction allowed for all taxpayers.
However, for those who can still benefit from itemizing deductions, here’s what you need to know:
State and Local Taxes (SALT)
The new tax law limits the deduction for all state and local taxes (SALT) to $10,000. These taxes include state and local income or sales taxes, real estate taxes, and personal property taxes.
Home Mortgage Interest
For 2018 through 2025, the TCJA limits the deduction for mortgage interest on $750,000 of NEW indebtedness used to buy, build or improve a first or second residence after December 14, 2017.
It also suspends the deduction for home equity interest — unless the proceeds are used to buy, build, or improve a home. That means if you have a home equity loan and you didn’t spend the proceeds to improve or buy your first or second home, you will not be able to deduct the interest on your 2018 income tax return. However, if you used all or a portion of the home equity loan proceeds to buy or improve your home, you can deduct the interest attributable to that portion of the loan.
Miscellaneous and Unreimbursed Employee Expenses
Under the TCJA, taxpayers can no longer deduct miscellaneous expenses such as job search expenses, tax preparation fees, and investment expenses. Unreimbursed employee expenses such as travel, union dues, home offices, uniforms, and depreciation on phones and computers used for work have also been eliminated.
Medical and Dental Expenses
For individuals who have high medical expenses, under the TCJA taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (AGI). This change has been made retroactive to January 1, 2017, and is effective for the 2017 and 2018 tax years. Beginning Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their AGI.
Changes to non-itemized deductions under the TCJA include:
The new tax bill eliminates the deduction for unreimbursed job-related moving expenses unless the taxpayer is an active-duty member of the armed services.
Casualty and Theft Loss
Under TCJA, casualty and theft loss is no longer deductible unless the taxpayer suffered a loss due to a federally-declared disaster.
For couples who divorce after 12/31/2018, alimony is no longer deductible for the individual who is paying it, and no longer taxable to the individual receiving it.
Bottom line: Run the numbers.
If you’re used to itemizing deductions, you’ll want to review the deductions you took in 2017 and see how they changed with the TCJA. One of the goals of the tax reform was simplifying tax preparation with a much higher standard deduction. For some it will still make sense to itemize, but many deductions have changed with the new tax bill.
If you have questions, want an analysis to determine how tax reform affects your 2018 income taxes, or want me to prepare your 2018 tax returns, call 574-271-6000 x1040 or email firstname.lastname@example.org to schedule an appointment.
About the Author:
Anne Redgrave, a University of Notre Dame graduate and the leader of Healy Tax, LLC, is federally licensed as an Enrolled Agent, which authorizes her to represent taxpayers (individuals, businesses, estates and trusts) before the IRS at all levels such as collections, audits, and appeals.