Itemized Deductions Under the New Tax Act
There seems to be a misconception that the new tax act has done away with itemized deductions. This is not the case. What the tax act has done is reduce the likelihood that taxpayers will need to itemize deductions. This has been accomplished through the increase of the standard deduction, and the temporary repeal of some itemized deductions. With a new tax year well under way, it is important to understand how these changes may affect you so that you can plan accordingly.
INCREASE OF STANDARD DEDUCTION
The new law increases the standard deduction as follows:
Head of Household $18,000
Married filing separately $12,000
The revised standard deduction provisions are temporary. Unless the law is extended by Congress, or the law is made permanent, the increased standard deduction will apply to taxable years 2018 to 2025 only.
CHANGES TO ITEMIZED DEDUCTIONS
By increasing the amount of the standard deduction it is anticipated that the need to itemize deductions will decrease. However, if your itemized deductions are greater than the standard deduction, you will still be able to itemize deductions. Will bunching itemized deductions provide you a higher deduction? As you read through the changes made to the itemized deductions you may want to plan for the year ahead to get the highest deduction possible.
Medical expenses: In 2018 medical and dental expenses which exceed 7.5% of adjusted gross income can be claimed as an itemized deduction. Thereafter, only medical and expenses which exceed 10% of adjusted gross can be claimed as an itemized deduction.
State and Local Taxes: Certain taxes can be claimed as itemized deductions. These include: (1) State, local and foreign real property taxes, (2) State and local personal property taxes, and (3) State, local and foreign income taxes. A taxpayer can elect to claim state and local sales tax as an itemized deduction instead of the state and local income tax.
For tax years 2018 to 2025 the law has changed not only the amount of taxes that can be claimed as an itemized deduction, but the amount that can be deducted. During these years, foreign real property taxes cannot be deducted. Additionally, the aggregate amount of taxes that can be deducted is limited to $10,000 ($5,000 for married taxpayers filing separately).
Mortgage Interest: The deductibility of mortgage interest depends on the type of mortgage giving rise to the payment of interest. There are special rules for the refinancing of a mortgage which are beyond the scope of this newsletter.
Acquisition Indebtedness: If the debt giving rise to the mortgage was incurred to purchase, build, or substantially improve the residence of the taxpayer, then the taxpayer may claim the interest paid on that debt as an itemized deduction. If the mortgage was incurred prior to December 15, 2017 then the amount of the debt on which interest can be deducted is capped at $1,000,000 ($500,000 for married taxpayers filing separately). For mortgages incurred after December 15, 2017 but before December 31, 2025, the cap on the debt is $750,000. In 2026 the cap goes back to $1,000,000.
Non-Acquisition Indebtedness: If the debt giving rise to the mortgage was not incurred to purchase, build, or substantially improve the residence (home equity debt) then the interest paid on the obligation is not deductible at all for taxable years 2018 to 2025.
Charitable Contributions: Donations made to charity may still be claimed as itemized deductions, with some minor changes. Beginning in 2018 contributions made to an institution of higher learning will no longer be deductible if the taxpayer receives, directly or indirectly, the right to purchase tickets for seating at athletic events in an athletic stadium of such institution. This change is permanent.
Generally, cash charitable donations are deductible so long as the total of the contributions does not exceed 50% of the taxpayer’s adjusted gross income. This limitation has been increased to 60% for taxable years 2018 to 2025.
Lastly, no deduction for contributions in excess of $250 will be allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgement of the contribution by the recipient, regardless of whether the contribution was reported by the recipient. This change was made retroactive and applies for donations made beginning January 1, 2017. Get a receipt!
Casualty Losses: The deduction for personal casualty losses has been repealed for taxable years 2018 to 2025. Casualty losses attributable to a federally declared disaster will be deductible. Thus, hurricane losses will probably still be deductible, but thefts, fires, sinkholes, mold and similar losses will not be deductible.
Miscellaneous Deductions: Unreimbursed employee expenses, the cost of safety deposit boxes, tax preparation fees, and other miscellaneous expenses qualified as itemized deductions to the extent they exceeded 2% of adjusted gross income. These miscellaneous expenses will not be deductible for taxable years 2018 to 2025.
Limitation: The amount of itemized deductions was subject to reduction for taxpayers whose adjusted gross income exceeded certain limits. These limitations are not applicable for taxable years 2018 to 2025.