To help minimize the confusion, we’ve compiled a list of major changes made to tax deductions in the past year, most of which are based on the Tax Cuts and Jobs Act of 2017 (TCJA), commonly referred to as tax reform.
Tax reform is considered the biggest change to the tax code in over 30 years, and will have a significant impact on your income tax returns both now and in the future. The changes offer some new avenues of tax savings, such as lowered taxes across the board for all taxpayers. However, they also phased out some popular deductions, including certain itemized ones. See which tax deductions are being changed or phased out this tax year and find out whether they include any you were counting on to help lower your taxes.
- Standard deduction: The significant increase in the standard deduction can be a big help to taxpayers – for Single and Married Filing Separate taxpayers, the new standard deduction is $12,000; it’s $24,000 for those who are Married Filing Jointly or Qualifying Widow(er)s; and it’s $18,000 if Head of Household. Due to its increase, more Americans will claim the standard deduction instead of itemizing, which will reduce the paperwork-gathering and record-keeping necessary to itemize deductions. Those taxpayers who are no longer itemizing deductions are generally getting a lower income tax than if they itemized deductions.
- Child Tax Credit: The changes to the child tax credits may help make up for the loss of exemptions. The Child Tax Credit has increased to $2,000 per eligible child, and the maximum income before the credit is phased out is now $400,000 if Married Filing Jointly and $200,000 for all other filing statuses. In addition, the refundable portion of the credit, the Additional Child Tax Credit, is now up to $1,400 per eligible child, which is an increase over the previous max credit allowed of $1,000. Taxpayers must have an earned income of over $2,500 to be eligible for the Additional Child Tax Credit. There is also a new part of the child tax credits available for any dependent not eligible for the traditional Child Tax Credit/Additional Child Tax Credits: the Credit for Other Dependents (ODC). This is a nonrefundable credit of $500 per dependent. Those eligible for the ODC include children over 16, children in college, and dependent parents.
- Unlimited State and Local Tax Deduction (SALT): Under tax reform, the deduction for state and local income and sales taxes, and personal and real property taxes, combined, is now capped at $10,000. If you live in a high-tax state, it is likely that you will see a reduction in your tax deduction. States with affected taxpayers have looked at ways to preserve these deductions on the federal return. The IRS has denied each option. However, taxpayers can still claim all of their real and personal property taxes on their state tax returns.
- Deduction of Home Equity Loan and Mortgage Interest: On mortgages taken after December 14, 2017, only the interest paid on up to $750,000 of mortgage debt is deductible. Home equity interest is limited to the interest on the portion of the loan used for home improvement. In all cases, the current total allowed interest is limited to the total first mortgage loan. If a taxpayer originally got a $300,000 mortgage and has a remaining balance of $125,000, a second mortgage for $50,000, and an eligible equity line of $30,000 to remodel the home, the interest on the total $205,000 principal is deductible. These limits apply to first and second homes. Mortgage loans in existence prior to December 15, 2017 are grandfathered under the previous $1,000,000 in principal.
- Casualty and Theft Losses: The traditional casualty and theft loss is now limited to losses from federally declared disasters. Taxpayers must suffer a loss of their home or personal items in the disaster area, or lose their business records in a disaster area, to claim the loss on their tax return. The total losses must be reduced by any received or expected insurance reimbursement, plus $100 per loss and 10% of Adjusted Gross Income (AGI) for the total losses.
Phased-Out Tax Deductions:
- Personal Exemptions: Before tax reform, you were able to deduct a predetermined amount for yourself and every family member listed on your tax return ($4,150 for 2018). The personal and dependent exemptions have been phased out until tax year 2026.
- Certain Miscellaneous Itemized Deductions: Under tax reform, certain miscellaneous itemized deductions are no longer deductible beginning tax year 2018. The deductions include: investment management fees, tax-preparation fees, and unreimbursed employee expenses such as a home office and business mileage on a personal vehicle.
- Deduction for Moving Expenses: Prior to the tax reform, you could deduct your moving expenses if you met the time and distance requirements. Beginning in 2018, this deduction became unavailable to everyone but members of the Armed Forces who are on active duty and need to relocate due to permanent change of station orders.
It is also important to note that while these deductions have been phased out, the new standard deduction is almost double the old one. This can help replace some – or, for some taxpayers, all – of the phased out exemptions and deductions.
Being aware of what deductions are being phased out or changed and what new elements have been introduced will help you maximize your tax return. Tax reform will impact everyone differently, depending on their tax situation. These tax reform measures will stay in effect until 2026 unless Congress passes a law making them permanent or extends them.