New Tax Law Changes for Itemized Deductions

The current tax reform bill signed into law by President Trump earlier last year and gone into effect starting this year (2018), has made significant changes to quite a few different types of taxes – not just for individuals, but for businesses, estates, and tax-exempt organizations like charities. Named the Tax Cuts and Jobs Act (TCJA), one of the ways in which the new presidency’s tax reform bill has shaken things up is through its changes in itemized deductions.

In the advent of this new tax reform bill, several itemized deductions have been restricted, and instead, standard deductions have been raised. If you are used to itemizing, then take out a notebook and consider changing your tax strategy.

What Are Itemized Deductions?

To review the basics: everyone understands how income taxes work. You make a dollar, part of that dollar is owed to the government. Taxation is a fundamental part of democracy, funding the state’s ability to serve the people and provide social services to Americans of all creeds and income levels. The amount you pay depends on how much money you make, placing you within one of several tax brackets.

However, before you place yourself within a specific tax bracket, tax deductions allow you to remove a portion of your income in your calculations, allowing you keep a portion of your income completely tax free. These deductions are either standard (applying to all individuals, based on their marital status and other factors such as disability) or itemized (expenses that effectively lower your taxable income).

The trick is that you can only choose one. This means you can choose either to itemize or take advantage of the standard deduction. For simplicity’s sake, the standard deduction is easier to apply – but for many, itemizing decreases the amount you owe to the IRS even further.

This may have changed for you, and it would be prudent to check with a tax advisor to see if itemizing is still the best decision for your tax bill. Take note that if you are married, you need to consider your spouse’s approach as well. If one of you itemize your deductions, you both must itemize, even if you file separately.

Medical-Expense Deductions

In the case of medical expenses of a non-cosmetic or otherwise non-essential nature (unless the cosmetic surgery was necessitated by a medical condition), deductions have been increased. Prior to the current law, if your net medical expenses totaled more than 10% of your gross income, you could deduct the excess.

Today, the threshold is reduced to 7.5%. This is a limited change, effective for 2017 and 2018, and scheduled to be changed back to 10% in 2019. If you have any costly procedures to go through for medical reasons, consider scheduling them sooner rather than later.

Home Mortgage Interest Deductions

Interest paid on the first $750,000 of mortgage debt is tax deductible, according to tax law. If your home’s total mortgage is less than $750,000, that means all your interest is tax deductible.

This is a good thing for most counties and states across America, but in neighborhoods with high housing prices, it is likely that your mortgage may end up being larger than $750,000, thus meaning you cannot take full advantage of this itemized deduction. Furthermore, interest on home equity loans is no longer deductible, outside of home improvements.

Casualty and Theft Loss Deductions

Financial and property casualties due to disaster events remain intact – but only if the President declared or cites said event as a disaster. This means any property damaged in a major earthquake or hurricane will lead to an itemized deduction – but theft no longer counts.

Charitable Deductions

Charitable deductions have not changed for the most part, but certain limits have been removed. Specifically, charitable deductions used to be reduced by 3 percent per dollar over a specific threshold to up to 80 percent, rendering high income individuals less capable of taking advantage of this itemized deduction. That has been changed, allowing all individuals to claim the same deduction if they choose to itemize.

State and Local Tax Deductions

Perhaps the most significant change in itemized deductions can be found in the new state and local income tax deductions, also known as SALT. Through SALT deductions, you can basically deduct a flat $10,000 from your income, sales, and property taxes. However, you must choose where to deduct the $10,000 – your income taxes and property taxes, or your sales taxes and property taxes.

The reason this has changed significantly is because in the past, these deductions were unlimited. For individuals in states with high income and property taxes (like California), this can make itemized deductions quite unattractive. Married couples filing separately only get a $5,000 cap per spouse. Single-person households retain the full $10,000 cap.

Miscellaneous Deductions

Before the new tax reform, it was possible to deduct specified moving costs when moving to another city or area for work-related reasons – this deduction no longer exists. While insignificant, this was not considered an itemized deduction anyway, being an “add-on” for any worker – as such, it hits every working taxpayer equally.

Double the Standard Deductions

The silver lining to all this is the fact that standard deductions have not just been raised for 2018 – they have been nearly doubled. For example: single taxpayers can claim a standard deduction of $12,000, versus the previous standard deduction of $6,350. Married taxpayers filing jointly have double the deduction ($24,000), and someone qualifying as the breadwinner/head of the household can claim an $18,000 deduction, up from $9,350.

Not only are several (not all) itemized deductions devalued in many cases, but the changes mean for some taxpayers, switching to the standard deduction may be wiser.

For most American taxpayers, the new reform will result in an overall lower tax bill. That does not include everyone, though – your tax bill may be higher now than it was last year if you relied heavily on deductions that have been largely devalued, specifically if the standard deduction has not made up for it.

As mentioned previously, be sure to consult a tax professional to determine whether the new tax bill results in a net gain or a net loss for you – and how to best pursue said gain and avoid said loss.