On December 22, 2017 the Tax Cuts and Jobs Act (TCJA) was signed into law. If you itemized your tax deductions in the past, will you still be able to do so?
Standard Deductions have increased
The first thing to know is that the standard deduction has increased. For calendar year 2017 the standard deduction was $6,300 if your filing status was single or married filing separately, $12,600 if your filing status was married filing jointly (or if you were a qualifying widower), and $9,300 if your filing status was head of household.
For calendar year 2018 the standard deduction is $12,000 if your filing status is single or married filing separately, $24,000 if your filing status is married filing jointly (or if you were a qualifying widower), and $18,000 if your filing status is head of household. If you did not itemize your tax deductions in the past and you continue to use the standard deduction, there is good news for you in the new tax law as your standard deduction has almost doubled! At most taxable income levels, there is even more good news as your tax rate is also reduced in calendar year 2018.
Itemized deductions are limited
The list of itemized deductions as well as some limitations of these deductions have changed under the TCJA. The medical expense threshold for calendar year 2018 was 7.5% of adjusted gross income. For calendar year 2019 it has increased to 10%. The deduction for state and local taxes—which had no limitation in calendar year 2017—is now limited to $10,000 beginning in calendar year 2018.
A projection of your calendar year 2018 income tax liability will help determine if you benefit or not by these changes to your deductions.
The mortgage interest limitation in calendar year 2017 was $1,000,000 of acquisition indebtedness. Beginning with calendar year 2018, however, the mortgage interest deduction is now limited to $750,000 of acquisition indebtedness. This means if your mortgage for the purchase or improvement of your first and second home is greater than $750,000 you cannot deduct all of the interest that you paid in your mortgage payment. For calendar year 2017 the deduction for charitable donations was limited to 50% of adjusted gross income. For calendar year 2018 the limit was increased to 60% of adjusted gross income. Miscellaneous itemized deductions that had an adjusted gross income threshold of 2% in calendar year 2017 were eliminated beginning in calendar year 2018.
These miscellaneous itemized deductions included unreimbursed business expenses, tax preparation costs, investment management fees, safe deposit box rental fees, and many others. This means that if you were able to deduct unreimbursed business expenses (work clothes, laundering your work clothes, supplies, travel expenses, and any other out-of-pocket business expenses paid by the employee and not reimbursed by the employer) on your calendar year 2017 individual income tax return, beginning with calendar year 2018 you can no longer deduct these expenses.
What does it all mean for you?
What these changes to the standard deduction and itemized deduction mean for many taxpayers, who in the past were able to itemize their deductions, is that they may now be using the standard deduction. Due to the complexities of the tax code, this may be good for some taxpayers and not good for others. I have analyzed client files by projecting their calendar year 2018 tax liability using their calendar year 2017 income and deductions, but the results are not consistent, with some clients’ tax liabilities decreasing and others increasing.
Due to the changes in the TCJA regarding allowable itemized deductions and how these changes interact with the calculation of the alternative maximum tax, each result is unique, and you’ll want to meet with your own CPA to determine how you may be affected.
A projection of your calendar year 2018 income tax liability will help determine if you benefit or not by these changes to your deductions. If you are adversely affected by these changes you may want to increase your withholding tax by filing a new Form W-4 with your employer or set aside the additional tax in preparation for payment with your tax return when you file in April 2019.