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How the TCJA Affected Some Taxpayer Deductions

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In the final column of his five-part series on issues surrounding the payment of state and local general sales taxes, expert Julian Block delves into the deductions the Tax Cuts and Jobs Act (TCJA) limited upon its enactment in 2017.

Jun 24th 2021
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For those of you who’re just joining in, here’s a recap of the first four parts. Part one explained that Form 1040’s Schedule A allows itemizers to deduct state and local income taxes or to deduct state and local general sales taxes. They can’t write off both in the same year (line 5a of 2020’s Schedule A for itemized deductions).

Part two discussed breaks on deductions for sales taxes for residents of states with low rates for income taxes and for seniors who live in states that authorize lower rates, exemptions and other kinds of special breaks for retirement income.

Part three explained how itemizers on Schedule A can add to the amount authorized by the “Optional sales tax tables” their actual payments on the purchase (or lease) of certain big-ticket items like cars, aircraft and boats.

Part four discussed the sales tax tables and focused on help available at irs.gov. The agency’s site offers an online tool designed to help perplexed taxpayers—or even paid preparers for that matter—calculate the IRS-blessed deduction.

Let’s conclude with part five. It focuses on wannabe itemizers like Sydney and Lucie Carton.

Like many millions of other itemizers, the couple discovers that they shouldn’t concern themselves with Schedule A deductions for state and local general sales taxes. The way for them to trim more taxes: skip Schedule A and file as nonitemizers.

Let’s focus on their potential schedule A write-offs. Are they, in the aggregate, anywhere near their standard deduction amounts of at least $24,800 and as much as $27,400 when both are older than age 65 (line 12 of 2020’s Form 1040 and 1040-SR)?

S’pose the Cartons are renters. Then they don’t deduct interest charges for home mortgages or real estate taxes.

Note that the TCJA replaced unlimited deductions for state and local taxes, including real estate taxes, state and city income taxes and state and city general sales taxes with annual caps of $10,000 for married couples filing joint returns and $5,000 for married couples filing separate returns.

S’pose they’re owners. They do pay real estate taxes (subject to that cap) and interest charges, assuming they’ve not paid off their mortgage (lines 5 and 8 of 2020’s Schedule A0.

The TCJA also limits deductions for interest charges. December 17, 2017, is the governing date.

For loans taken out by the 15th, interest is deductible on mortgage debts of as much as $1 million. For loans taken out after the 15th, the TCJA allows deductions for interest on mortgage debts of no more than $750,000 ($375,000 for married couples filing separate returns). These caps aren’t indexed, just like the caps on state and local taxes.

On to state income taxes. S’pose the tax-savvy Cartons opted to live in a state that doesn’t impose income taxes. Then there’s nothing to deduct.

S’pose their state imposes them. Then they’re thwarted by that pesky cap.

The Cartons aren’t able to deduct all of their medical expenses. They’re allowable only for the amount above the nondeductible threshold of 7.5 percent of adjusted gross income (line 3 of 2020’s Schedule A).

For instance, someone whose AGI checks in at $200,000 forfeits any deduction for the first $15,000 of medical expenditures. The Cartons didn’t incur large expenses not covered by insurance or otherwise reimbursed.

What’s left to discuss about the couple’s Schedule A deductions? Only their charitable contributions.

Their donations include: checks to charities; unreimbursed, out-of-pocket expenses incurred to do volunteer work for philanthropic organizations like schools and churches (line 11 of 2020’s Schedule A); and noncash contributions of used clothing, furniture and kitchen items to outfits like Goodwill (line 12).

The unsurprising outcome: donations are nowhere near their standard deduction amounts of at least $24,800 and, if both are older than 65, as much as $27,400.

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