How Changes to Individual Deductions Affect Your 2018 Tax Bill

The Tax Cuts and Jobs Act (TCJA) that affects tax returns beginning with the 2018 tax year has many changes that may affect your 2018 taxes. The law could increase your standard deduction or it could eliminate some tax breaks you have been used to in prior years.

As you may know, the IRS allows the greater of the “standard deduction” or the total of your itemized deductions. Itemized deductions have traditionally included items like state income taxes, real estate taxes, mortgage interest, charitable contributions, investment advisory and tax preparation fees, and unreimbursed business expenses.

The TCJA has increased the standard deduction by almost doubling it, but it also limited the deduction for state and real estate taxes, and eliminated deductions like unreimbursed business expenses and certain deductions like investment advisory and tax preparation fees. Here are some of the highlights.

The Increased Standard Deduction

If you don’t have enough in itemized deductions to exceed the standard deduction, the IRS allows a standard amount to reduce your adjusted gross income. In 2017 standard deduction was $12,700 for joint filers, $9,350 for heads of household, and $6,350 for single filers and married filing separately.

The TCJA increases the standard deduction to almost double. The new deductions are $24,000 for joint filers, $18,000 for heads of household, and $12,000 for single and married filing separate filers.

If you normally took the standard deduction or your itemized deductions were not significantly higher than the standard deduction, you will see a benefit.

State and local tax deduction

For years beginning in 2018, your entire deduction for state and local taxes is limited to $10,000 ($5,000 if you are married filing separately). These taxes include state income taxes, local income taxes, real estate taxes and taxes on personal property. Individuals in states with high real estate taxes, or that normally pay high amounts of state income taxes will be negatively impacted by this change.

Mortgage and home equity debt interest deduction

Generally, you can deduct interest on mortgage debt used to purchase, build or improve your principal residence and a second residence. Starting in 2018, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after December 15, 2017.

The TCJA also changes the deductibility on interest incurred on home equity debt. Before the law change, interest on up to $100,000 of home equity debt used for any purpose was deductible. The TCJA limits the home equity interest deduction starting in 2018 to debt that would qualify for the mortgage interest deduction. In other words, home equity debt must be used to purchase or improve your primary or secondary residence for it to be deductible. Any portion of the loan used to pay personal expenses such as debt consolidations, vacations or other personal expenses, will not be deductible.

Miscellaneous itemized deductions subject to the 2% floor

The TCJA has eliminated this deduction for expenses including investment advisor fees, tax preparation fees, safe deposit fees, and unreimbursed business expenses starting with the 2018 tax return. This affects taxpayers that pay investment management fees and employees such as sales people who may not be able to have their employee expenses reimbursed by their employer.

Personal casualty losses

Under the new law, this deduction has been eliminated unless the loss was due to a federally declared disaster area.

Overall limitation on itemized deductions is eliminated

Under previous law, there was a phaseout of total itemized deductions for certain high-income taxpayers ($313,800 for joint taxpayers with other amounts for other types of filers). The new law eliminates this limitation.

While the law limits or eliminates several deductions, the increase in the standard deduction could more than offset the reduction, and you could still see a tax benefit in this area. Speak with your tax professional to see how this affects you and for any strategies that could benefit you in pro-active tax planning.