Tax reform introduced by the Tax Cuts and Jobs Act, which was passed by Congress in December 2017, changes the way many taxpayers will file their taxes for subsequent tax years. Tax brackets and tax rates have been adjusted, and the standard deduction has been raised, but many itemized tax deductions that were previously used to reduce taxable income have been removed or restricted. The changes will simplify tax returns for a large number of taxpayers, especially among the 30 percent of those who have itemized deductions in the past. Tax experts are predicting that far fewer taxpayers will be claiming itemized deductions in the future due to tax reform.
New Limits on Tax Write Offs
The biggest shock that many taxpayers will experience as a result of tax reform is related to things you can write off on your taxes. The term “write off” refers to an expense that the IRS allows you to deduct from your taxable income on your tax return, possibly resulting in a lower tax rate. These expenses are also referred to as deductions. There are new limits on deductions for mortgages, with only the interest on the first $750,000 deductible for homes purchased after 2017. Although this limit sounds high, there are many areas of the country where homes frequently cost $1 million or more. The deduction for interest on home equity loans has been removed completely unless the loan was used solely to improve your current home.
The deduction for other taxes, including sales tax, property tax and local and state income taxes, is now limited to $10,000 for individual and married taxpayers filing jointly, while married couples who file separately can only deduct $5,000. The deduction for property taxes on foreign real estate, previously allowed for Americans living in other countries, has been eliminated.
Taxpayers can no longer deduct personal theft and casualty losses. The exception is for losses caused by a national disaster recognized by FEMA, the federal disaster emergency agency. Even then, the reported loss must be greater than 10 percent of your adjusted gross income. This means you can deduct for losses caused by natural disasters but not for theft or damages caused by people.
Those who are divorced will see a difference in how the IRS handles alimony payments following tax reform. For divorces executed or modified after 2018, the spouse who pays alimony will no longer be able to deduct those payments. Another big change is that the spouse who receives alimony will no longer need to declare the payments as income.
Several miscellaneous deductions have been suspended. In past tax years, these deductions were allowed if they exceeded 2 percent of your adjusted gross income. They include work-related expenses such as meals, entertainment, uniforms and union dues. The deductions for tax preparation fees and many investment fees have also been suspended. You won’t be able to claim moving expenses or the use of an auto to move since that deduction has also been suspended except for members of the U.S. military on active duty.
Deductions You Can Still Take
One of the write-off items that survived tax reform is the deduction for charitable contributions. H&R Block reports that more than 80 percent of taxpayers claim a charitable contribution deduction on their taxes. For the 2018 tax year, taxpayers can still claim a deduction of up to 60 percent of your adjusted gross income for charitable donations, a change from 50 percent in previous tax years.
Taxpayers will also still be able to take a deduction for unreimbursed medical expenses that exceed a specified limit. For the 2016 tax year, you could deduct medical expenses that were greater than 10 percent of your adjust gross income. For your 2017 and 2018 taxes, you can deduct unreimbursed expenses above 7.5 percent of your income. In 2019, your medical expenses will again need to exceed 10 percent of your income before you can claim them as a deduction.
Additional Benefits for Dependents
For taxpayers who file for the Child Tax Credit, the maximum credit is increased by tax reform to $2,000 for each qualifying child. The income limit for those who claim the credit has been increased to $200,000 for taxpayers filing as individuals and $400,000 for married taxpayers who are filing jointly. This credit can be claimed for dependent children under age 17, full-time students and certain other relatives, but beginning in 2018, you must provide a Social Security number for each child or dependent you claim.
2018 Tax Law
The standard deduction is an amount that reduces taxable income for all taxpayers, who have the option of using the standard deduction instead of itemizing their deductions. The changes to itemized deductions brought on by tax reform in 2018 are offset for most taxpayers by a standard deduction that has nearly doubled from $6,350 to $12,000 for those filing as single and from $12,700 to $24,000 for married filing jointly. The higher standard deductions will remain in effect through 2025.
In addition to changes to the standard deduction and itemized deductions, the $4,050 personal exemption that taxpayers could claim for each family member has been eliminated until 2025. On the plus side, tax rates for most taxpayers were reduced by the Tax Cuts and Jobs Act. For returns filed in 2019 for the 2018 tax year, tax rates are 10, 12, 22, 24, 32, 35 and 37 percent. New withholding tables were issued by the IRS in 2018, and taxpayers are encouraged to file a new Form W-4 with their employer to help ensure that the correct amount is being withheld from their wages throughout the year. The IRS has also issued a new withholding calculator that reflects the new tax rates.
Due to the suspension and removal of so many deductions, the Tax Policy Center estimates that at least 25 million returns will no longer include itemized deductions. You should still consider itemizing on your 2018 taxes if your deduction total exceeds your new standard deduction, but you will have to calculate your taxes for both scenarios to be sure. If in doubt, this is one year when it makes sense to consult a tax expert if you have questions about whether you should itemize your expenses or take the standard deduction on your return. If you do decide to itemize on your 2018 return, the limit the IRS once placed on itemized deductions has been suspended. This means that some taxpayers with higher incomes no longer have a limit on their total itemized deductions.
2017 Tax Law
For the 2017 tax year, tax rates were 10, 15, 25, 28, 33, 35 and 39.6 percent. With more deductions allowed for taxes in 2017 and previous years, many taxpayers itemized their deductions on Schedule A rather than taking the standard deduction. For example, you could deduct all the interest for a home equity loan even if the money was used to pay off credit card debt or purchase a big-ticket item. Fewer taxpayers are expected to use Schedule A following the Tax Cuts and Jobs Act, but the increases in standard deductions should offset the difference for most. For example, if your itemized deductions came to $18,000 in 2017 and you filed jointly with your spouse, the new $24,000 standard deduction will actually be significantly higher.