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The Shifting Deduction Landscape Under the TCJA

Jun 25th 2019
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Before the Tax Cuts and Jobs Act (TCJA), most moderate-to-high-income taxpayers itemized deductions on Schedule A, rather than claiming the standard deduction on their personal returns. Due to a few sizeable deductions, the amount often exceeded the standard deduction—sometimes by a lot.

Since it was passed, the TCJA has changed the lay of the deduction land for 2018 through 2025. In addition to eliminating or modifying certain deductions, the new law effectively doubled the standard deduction to $12,000 for single filers and $24,000 for joint filers. (The inflation-indexed amounts for 2019 are and $12,200 and $24,400, respectively.)

The key changes that your clients need to know for itemized deductions under the TCJA are as follows:

State and Local Taxes

As before, an itemized deduction is available for any combination of state and local tax (SALT) payments of (1) property taxes and (2) income taxes or sales taxes.

But the annual SALT deduction can’t exceed $10,000 no matter the amount of taxes paid. This is a significant impediment for many taxpayers, especially those in high-tax states, and may result in a switch to the standard deduction all by itself.

Mortgage Interest

Previously, you could deduct mortgage interest on the first $1 million of acquisition debt and the first $100,000 of home equity debt. But the TCJA reduced the threshold for new acquisition debt to $750,000 and eliminated the deduction for home equity debt. Note, however, that a home equity loan may qualify as an acquisition debt if the proceeds are used for home improvements.

Charitable Contributions

On the plus side, the TCJA raised the general limit on deductions for charitable contributions from 50 percent of adjusted gross income (AGI) to 60 percent of AGI. Most of the other rules for charitable deductions remain in place.

Casualty and Theft Losses

The TCJA eliminated the deduction for casualty and theft losses, except for losses sustained in a federal disaster area. The prior rules for claiming losses, including the floor of 10 percent of AGI, continue to apply to qualified losses.

Miscellaneous Expenses

You can no longer deduct miscellaneous expenses such as employee business expenses and production-of-income expenses like tax advisory fees. Previously, the deduction was limited to the excess above 2 percent of AGI.

Medical Expenses

The TCJA gave taxpayers a temporary break by reducing the threshold for deducting medical expenses from 10 percent of AGI to 7.5 percent of AGI. But this change only applies to the 2017 and 2018 tax years. Beginning with the 2019 tax year, the threshold reverts to 10 percent of AGI.

In conjunction with these changes, the TCJA also repealed the “Pease rule” reducing the tax benefit of certain itemized deductions for high-income taxpayers.

When you combine the cutbacks in itemized deductions with the increased standard deduction, many taxpayers who previously itemized discovered that they were better off switching to the standard deduction. And when you throw in other factors, such as the loss of personal exemptions, their tax liability was often higher than expected. That caused some consternation this past tax return season.

Practical Suggestion

Take a mid-year snapshot of the tax picture for each client. Depending on their situation, they may be advised to bunch deductible expenses like charitable contributions in a tax year in which they can expect to itemize. If it appears they won’t be itemizing in 2019, they may as well postpone those expenses to a following year in which they might derive benefits for itemized deductions.

Next up in this series, the Marriage Penalty

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