How The Tax Cuts and Jobs Act Affects Itemized Deductions
The Tax Cuts and Jobs Act will affect how individual citizens claim deductions. This article recaps some of the very basic things to keep in mind as tax filing season approaches.
First, remember that the standard deduction amounts are nearly double for 2018 compared to what they were 2017. The amounts break down as follows:
Joint returns and surviving spouses – $24,000
Heads of Household – $18,000
Singles – $12,000
Married filing separately – $12,000
Citizens who have reached the age of 65 during the tax year or are legally blind get an additional standard deduction. The additional standard deduction amounts are as follows:
Joint returns and surviving spouses – $1,300
Heads of Household – $1,600
Singles – $1,600
Married filing separately – $1,600
Because of the substantial increase in the standard deductions, many people who formerly itemized deductions will likely be better served by claiming the standard deduction. Thus, the much talked about limitations to itemized deductions will have very little impact on most filers. For example, about 70% of all returns filed prior to the Jobs Act didn’t claim itemized deduction in the first place. For all those people, the near doubling of the standard deduction will mean great tax savings, even if there were no changes to their financial lives whatsoever. This fact alone should put to rest the bogus claim that the Jobs Act was nothing more than “tax cuts for the rich.”
For those who continue to itemize, there are a few things to keep in mind as you organize your records for tax return filing.
1. The limit on overall itemized deductions is suspended. The income-based phase-out of certain itemized deductions does not apply in 2018. This means that some higher-income people will be able to deduct more of their total itemized deductions than in the past when their income was above certain levels.
2. Deductions for state and local taxes are limited. The deduction available for state and local income taxes, sales taxes and property taxes is limited to a combined, total deduction. The limit is $10,000 for married filing jointly, and $5,000 for single filers. Anything above the cap is not deductible. However, with the near doubling of the standard deduction, the limitation on state and local taxes may be moot for a great deal of people. It may be that most people will be better served with the higher standard deduction than they would be with a full deduction for state and local taxes.
3. Lower dollar limit on home residence loan balance. The date you acquired a mortgage or home equity loan on your main home may impact the amount of interest you can deduct. If your loan originated on or before December 15, 2017, you may deduct interest on up to $1 million of qualifying mortgage debt ($500,000 for married filing separately). If the loan originated after that date, you may only deduct interest on up to $750,000 in qualifying debt ($375,000 for married filing separately). The limits apply to the combined amount of loans used to buy, build or substantially improve your main home and a second home.
4. The deduction for home equity interest is modified. Interest paid on most home equity loans is not deductible unless the loan proceeds were used to buy, build or substantially improve a main home or second home. For example, interest on a home equity loan used to build an addition to an existing home is typically deductible. However, interest on a home equity loan used to pay personal living expenses, vacations, most vehicles, and credit card debts, is not. In any case, to be deductible, the loan must, a) be secured by your main home or a second home, b) not exceed the cost of the home, and c) meet certain other requirements.
5. The limit for charitable contributions is modified. The annual limit on the deduction for charitable contributions of cash increased from 50% to 60% of one’s adjusted gross income. This means that those who make large charitable donations can deduct more of what they gave in 2018.
6. The deduction for casualty and related losses is modified. Personal casualty losses must now be attributable to a federally declared disaster to be deductible.
7. Miscellaneous itemized deductions are suspended. Under prior law, people who itemized deductions could deduct miscellaneous itemized deductions that exceeded 2% of adjusted gross income. These expenses are no longer deductible. This includes unreimbursed employee expenses such as costs for uniforms, union dues and the deduction for worker-related meals, entertainment and travel. It also includes deductions for tax preparation fees and investment expenses, such as investment management fees and safe deposit box fees.
However, do not confuse this with meal and travel expenses associated with businesses. Despite much confusion over the issue, business meals for self-employed people remain tax deductible.
Get More Help Now
With all the changes brought about by the Tax Cuts and Jobs Act, it is more important than ever to get counsel when preparing your tax return. Check with the Tax Freedom Institute member nearest you to get the help you need now. Go here.