New Tax Act Changes What You May Deduct

The newly passed Tax Cuts and Jobs Act (TCJA) has made big changes to the items that may be deducted as itemized deductions. The TCJA has changed both what and how much is deductible for state and local income or sales taxes, property taxes on homes, home mortgage interest, charitable contributions, and more. The TCJA also raised the standard deduction in 2018 to $12,000 for single taxpayers and $24,000 for married couples filing a joint return. This will most likely mean that fewer taxpayers will itemize for 2018.

Here are a few ways the TCJA has changed itemized deductions:

Caps placed on the State and Local Tax (“SALT”) deduction

The deduction for all state and local taxes combined—including state and local income, sales, real estate, and property taxes—cannot exceed $10,000. High-tax state taxpayers could see a substantial amount of their SALT deduction reduced. Curbing this deduction could make itemizing pointless for many taxpayers, but the way any taxpayer will be impacted depends wholly on their specific situation.

Medical deduction

Medical expense deductions also have been changed. Under the previous tax law, taxpayers could deduct the excess of unreimbursed medical expenses that exceeded 7.5% of their adjusted gross income. Under the TCJA, beginning in 2019, taxpayers may deduct only unreimbursed medical expenses that exceed 10% of their adjusted gross income.

Mortgage and home equity loan interest

Though real estate taxes are contained within in the $10,000 SALT limit, mortgage interest remains deductible but with two significant changes:

First, only the interest on the first $750,000 of mortgage debt is deductible for any mortgages taken out after December 14, 2017. This change may be of little concern in places where housing prices are comparatively low, and mortgages are under this limit. Nonetheless, in locations with high residential real estate costs like San Francisco and Seattle, a mortgage this size is quite common.

Second, home equity loan interest will no longer be deductible after 2017. This change affects interest on home equity loans used for any purpose other than improvement of the current home. This change is applicable even if the loan was signed before December 15, 2017.

Charitable contributions

The TCJA enhanced the deduction for charitable contributions by lifting the amount that is deductible for any one year to 60% of adjusted gross income, which is up from 50%. By contributing more to their favorite charity, taxpayers who have lost the value of some deductions (such as the SALT deduction) can continue itemizing and potentially make up the difference.

Other itemized deductions

The TCJA removed unreimbursed employee expense deductions, tax preparation fees and other miscellaneous deductions. The personal casualty and theft loss deductions have also been eliminated, although certain casualty losses in federally declared disaster areas may still be claimed.