The Tax Cuts and Jobs Act of 2017 will sharply decrease the number of taxpayers that take itemized deductions on their Form 1040 tax returns. You generally have two options when it comes to tax deductions: (1) take the standard deduction, or (2) itemize your deductions on Schedule A. Congress, in an attempt to simplify the tax code, adopted a two-prong strategy to discourage itemizing deductions beginning January 1st, 2018. First, it substantially increased the amount of the standard deduction by nearly doubling it for every filing status. Second, the kind and type of itemized deductions that you can take are either limited or eliminated altogether. Here is the summary of changes:
1. Standard Deduction
- TAX YEAR 2017: The standard deduction was $6,350 for single filers or married filing separate, $9,350 for head of household, and $12,700 for married filing jointly. There was also an additional standard deduction of $1,250 for individuals that are blind or over age 65, or $1,550 if those individuals are also unmarried. The standard deduction for a taxpayer claimed as someone's dependent cannot exceed the greater of (1) $1050, or (2) $350 plus the dependent's earned income.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, the standard deduction will be $12,000 for single filers or married filing separate, $18,000 for head of household, and $24,000 for married filing jointly. These amounts will be adjusted for inflation in tax years after 2018. The additional standard deduction is increased to $1,300 for individuals that are blind or over age 65, or $1,600 if those individuals are also unmarried. The standard deduction for taxpayers claimed as someone's dependent does not change.
2. Medical Expense Deduction
- For tax years 2017 and 2018, all taxpayers that itemize will be allowed to deduct the expenses paid during the tax year for the medical care of the taxpayer, his or her spouse and dependents TO THE EXTENT that the medical expenses exceed the threshold of 7.5% of the taxpayer's adjusted gross income (or "AGI"). Absent a change in the law, the medical expense deduction threshold in tax year 2019 will apply to those amounts exceeding 10% of the taxpayer's AGI (or 7.5% if the taxpayer reaches age 65 by the end of the tax year).
3. State and Local Tax (SALT) Deduction
- TAX YEAR 2017: Taxpayers who itemize could deduct from their taxable income several types of taxes in any amount paid or accrued at the state and local level, including real and personal property taxes, income taxes and sales taxes.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, taxpayers who itemize can deduct any amount of state and local property taxes or sales taxes (but not state and local income taxes) ONLY when paid or accrued in carrying on a trade or business. The taxpayer may claim an itemized deduction up to $10,000 ($5,000 if married filing separately) for the aggregate of those state and local property taxes paid or accrued outside of a trade or business, and other state or local income taxes, war profits and excess profits paid or accrued.
4. Mortgage and Home Equity Indebtedness Interest Deduction
- TAX YEAR 2017: Taxpayers who itemize could deduct the mortgage interest on a qualified residence for indebtedness up to $1 million ($500,000 if married filing separately). Taxpayers may also take an itemized deduction for the interest on home equity indebtedness up to $100,000.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, taxpayers who itemize could deduct the mortgage interest on a qualified residence for indebtedness up to $750,000 ($375,000 if married filing separately). The deduction for interest on home equity indebtedness is SUSPENDED during this period. These lower limits DO NOT APPLY to indebtedness acquired before December 15th, 2017, even if the indebtedness is refinanced (provided that the new indebtedness resulting after the financing does not exceed the old $1 million/$500,000 limit).
5. Charitable Contributions
- TAX YEAR 2017: Taxpayers who itemized could take a charitable contribution deduction limited to a prescribed percentage of the taxpayer's "contribution base" (defined as AGI minus any net operating loss carryback to this tax year). The applicable percentages were 50%, 30% or 20%, depending on what type of organization that the contribution was made. The 50% limitation applies to charitable contributions to public charities and certain private foundations. A donor was also allowed to deduct 80% of a payment as a charitable contribution where certain payments were made to a college or university in exchange for the right to purchase tickets or seats at an athletic event.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, the 50% limitation that applies to charitable contributions to public charities and certain private foundations is INCREASED to 60% (and contributions exceeding this amount can be carried forward and deducted for up to five years). However, no charitable deduction is allowed for contributions of $250 or more unless the donor substantiates the contribution with a written acknowledgment from the receiving organization. Furthermore, charitable deductions are no longer allowed for payments to a college or university where the donor receives in exchange the right to purchase tickets or seats at an athletic event.
6. Personal Casualty and Theft Losses
- TAX YEAR 2017: Taxpayers that itemize can generally claim deductions for uncompensated personal casualty losses, including those occurring due to fire, bad weather or theft. These personal loss deductions were limited by the taxpayer subtracting $100 from the cost of EACH EVENT and then subtracting 10% of the taxpayer's AGI from the TOTAL OF ALL EVENTS.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, the deduction for personal casualty and theft losses IS SUSPENDED.
7. Miscellaneous Itemized Deductions
- TAX YEAR 2017: Taxpayers that itemize can claim certain expenses as miscellaneous deductions provided the amount of expenses claimed is more than 2% of the taxpayer's AGI. Deductions that were subject to this limit included (but were not limited to): certain unreimbursed employee expenses (e.g. union dues, work tools, etc.), expenses related to producing or collecting income (e.g. fees to collect interest and dividends, investment fees), expenses relating to managing or conserving property that produces income (e.g. clerical staff supervising investment property), expenses relating to determining or claiming a tax refund, and tax preparation fees.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, the deduction for miscellaneous itemized deductions subject to the 2% AGI floor IS SUSPENDED. This does not affect those deductions for employee-related expenses that may be included on Schedule C if you file taxes as a business owner.
8. Overall Limitation ("Pease Limitation") On Itemized Deductions
- TAX YEAR 2017: High-income taxpayers who itemized their deductions were subject to an overall limitation on these deductions (the "Pease Limitation"). For taxpayers who exceeded the threshold, the allowable amount of itemized deductions was reduced by 3% of the taxpayer's AGI. The total reduction could not be greater than 80% of all itemized deductions.
- TAX YEAR 2018: For tax years from January 1st, 2018 to December 31st, 2025, the overall limitation ("Pease Limitation") on itemized deductions is SUSPENDED.
Other deductions and exclusions from income that are suspended for tax years from January 1st, 2018 to December 31st, 2025 include the qualified bicycle commuting exclusion, the employee moving expense reimbursement exclusion and the moving expense deductions. If you have questions on how these changes in the tax law affect your unique situation, then do not hesitate to contact the legal and tax professionals at Kershaw, Vititoe & Jedinak PLC.