A lot of clients still ask about what has changed with tax deductions for individuals. This short article might help.
The recently enacted tax reform law made some significant changes to the system of income tax deductions used by consumers. Here are highlights of the changes.
The standard deduction is increased.
The standard deduction has grown. Because of the significant increases, many taxpayers who formerly itemized their deductions may now benefit from the standard deduction instead.
Changes in Standard Deductions
Filing Status Old Law New Law
Single $6,500 $12,000
Married filing jointly $13,000 $24,000
Head of Household $9,550 $18,000
Married filing separately $6,500 $12,000
The deduction for state and local taxes is reduced.
For those who itemize their deductions, the maximum amount permitted for all state and local taxes (SALT) combined is $10,000 per year ($5,000 for married individuals filing separately). How the new limit affects you will depend on your specific situation. If you live in a high-tax state, you may see much of your SALT deduction reduced, and that could mean that itemizing deductions is no longer the better option.
The mortgage interest deduction has a lower cap.
For mortgage debt incurred after December 15, 2017, you may only deduct interest on debt value up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. For home equity debt, the deduction for interest is suspended through 2025, unless the proceeds are used to buy, build, or substantially improve the home that secures the loan.
Casualty and theft losses are not now generally deductible.
Only losses that occur as the result of a federally-declared disaster may be deducted. Formerly, casualty and theft losses had generally been deductible to the extent they exceeded 10% of adjusted gross income (AGI).
Miscellaneous itemized deductions are suspended.
Various miscellaneous expenses, such as unreimbursed employee business expenses and tax preparation expenses, were formerly deductible as an itemized deduction to the extent they totaled more than 2% of the taxpayer’s AGI. The new law suspends the deduction for these expenses.
Charitable contributions are still deductible if you itemize.
Cash contributions will now be allowed up to 60% of the taxpayer’s “contribution base,” up from 50%. A taxpayer’s contribution base is generally equal to AGI exclusive of any net operating loss carryback for the year. This change will affect only those taxpayers who contribute a significant proportion of their income to charity.
Medical expense rules become more generous.
Taxpayers with substantial medical expenses who also itemize can now deduct unreimbursed medical expenses in excess of 7.5% of their AGI, down from the deductibility threshold of 10% previously.
Moving expenses lose their tax advantage.
The deduction for qualified moving expenses, which can be claimed even if a taxpayer doesn’t itemize, has been suspended, except for members of the Armed Forces on active duty (provided certain conditions are met).
The alimony deduction for payers is eliminated.
The tax treatment of alimony payments will change significantly under the new law. Such payments will no longer deductible by the payer (and the recipient will no longer be required to include the alimony in income). The change applies to alimony paid under any divorce or separation agreement executed after December 31, 2018.
Note that some of these provisions are scheduled to sunset in 2019 or 2026 unless Congress acts to extend them. Talk to your tax advisor to see how the law may ultimately impact your situation.