The Deep Dive: Significant Changes to Itemized Deductions

By Josie Dillon, CPA
Manager, Tax Services
JDillon@sponselcpagroup.com

The Deep Dive takes a closer look at individual aspects of the new tax law and how they might affect you or your business.

The Tax Cuts and Jobs Act (TCJA) has brought many changes for individual income tax filers, including significant changes to some of the more popular deductions.

As was the case under previous law, individual tax filers can still subtract from adjusted gross income (AGI) their option of either a standard deduction or the sum of their itemized deductions to arrive at taxable income. However, the Tax Act has nearly doubled the “standard deduction” amount. The standard deduction for 2018 is $24,000 for joint filers; $18,000 for heads of household; and $12,000 for singles or married taxpayers filing separately. The standard deduction figures will be indexed for inflation after 2018. Given these increases, fewer taxpayers will benefit from itemizing deductions.

In addition to the increase in the standard deduction amounts, the new tax law also made changes to several itemized deductions which are explained in more detail below.

Limitation on State and Local Taxes Paid

The new tax law has placed limits on an individual’s ability to deduct state and local taxes as an itemized deduction. Before the changes were effective, individuals were permitted to claim the various types of taxes – real property taxes, personal property taxes, state and local income taxes, and state and local sales taxes (if elected) – as itemized deductions.

For tax years 2018 through 2025, the new tax law limits deductions for taxes paid by individual taxpayers in the following ways:

  • The new law limits the aggregate deduction for state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for married filing separately). Important Note: The $10,000 limit doesn’t apply if the taxes are paid or accrued in carrying on a trade or business or in an activity meant for the production of income.
  • The new law also completely eliminates the deduction for foreign real property taxes unless they are paid or accrued in carrying on a trade or business or in an activity engaged in for profit.

See previous Sponsel CPA Group article regarding the deductability of prepaid real estate taxes as a result of the new tax law.

Mortgage Interest Deduction

For tax years beginning after 2017 and before 2026, the TCJA modifies the mortgage interest deduction rules, as follows:

  • Acquisition Indebtedness – The deduction for mortgage interest on a principle or second residence is limited to underlying indebtedness of up to $750,000 (down from the $1 million under prior law). The lower $750K limit does not apply to any acquisition indebtedness incurred on or before December 15, 2017. Additionally, the $1 million limitation continues to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred on or before December 15, 2017, so long as the indebtedness resulting from the refinancing doesn’t exceed the amount of refinanced indebtedness.
  • Home Equity Indebtedness – Taxpayers can no longer claim a mortgage interest deduction for interest paid on home equity indebtedness. Under prior law taxpayers could claim a deduction for the interest paid on home equity indebtedness with a loan value up to $100,000. Home equity indebtedness is any indebtedness (other than acquisition indebtedness) secured by a qualified residence. Acquisition indebtedness is any indebtedness incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and it is secured by such residence.

Charitable Contribution Deduction

For contributions made in tax years beginning after December 31, 2017 and before January 1, 2026 taxpayers can deduct cash contributions to public charities and certain private foundations up to 60% of their AGI (under prior law the deduction was limited to 50% of AGI).

In addition, some experts are predicting a significant decline in charitable contributions as many taxpayers will no longer receive a tax benefit as their total itemized deductions will not exceed the increased standard deduction amount. However, there are still some planning opportunities for charitably inclined taxpayers looking to optimize their deductions. For instance, “qualified charitable distributions” directly from a taxpayer’s IRA remain unaffected by the Tax Act, and “donor advised funds” allow for charitable deductions in one year, with the funds available for distribution to charities in subsequent years.

Other Changes to Itemized Deductions

  • Medical expenses are deductible after they exceed 7.5% of AGI for tax years 2017 and 2018. Previously, the AGI floor was 10% for most taxpayers.
  • Casualty and theft losses have been suspended except for losses incurred in a federally declared disaster.
  • There is no longer a deduction for miscellaneous itemized deductions, which were formerly deductible to the extent they exceeded 2% of AGI. This included such deductions as tax preparation costs, investment expenses, union dues and unreimbursed employee expenses.
  • The overall limitation on itemized deductions that formerly applied to taxpayers whose AGI exceeded specified thresholds has been suspended.

Sponsel CPA Group is here to help you manage these significant changes and maximize your benefits. If you have any questions about the new tax reform law, please call Josie Dillon at (317) 613-7841 or email JDillon@sponselcpagroup.com.

Click here for detailed article on “Modifications to Deductions of Losses” 
Click here for detailed article on “Business Expense Deduction Limitations”
Click here for detailed article on the “Pass-Through Income Deduction”
Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”
Click here for detailed article on “New Favorable Depreciation Provisions”
Click here for summary of “Key Provisions Affecting Individual Taxpayers”
Click here for summary of “Key Provisions Affecting Business Taxpayers”

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