Continuing on with our discussion of the changes in the tax code created by the passage of the Tax Cuts and Jobs Act (TCJA), this week we are going to talk about the standard deduction and itemized deductions.
Much of the hype in the media before the passage of the TCJA focused on the increase in the standard deduction. The amount of the increase depends upon your tax filing status.
- Married filing joint or qualifying widow(er) standard deduction increased from $12,700 for 2017 to $24,000 for 2018.
- Married filing separately increased from $6,350 to $12,000.
- Single filer standard deduction increased from $6,350 to $12,000.
- Head of Household filer standard deduction increased from $9,350 to $18,000.
All of those increases are good news for many people. However, the media hype often fails to mention that the TCJA repealed the personal exemption. The personal exemption in 2017 was $4,050 for each person listed on the tax return. To put it in numbers, a married couple with two children in 2017 would have had a standard deduction of $12,700 and a personal exemption deduction of $16,200 ($4,050 times four). That would be a total reduction in their taxable income of $28,900. For 2018, that same couple will have a standard deduction of $24,000 and no personal exemption deduction. Consequently, their taxable income will increase by $4,900 if their total income stays the same.
For many folks, the increase in the standard deduction will eliminate their need to itemize deductions. For those who are still able to itemize, there are several changes on Schedule A (Itemized Deductions).
Medical and Dental Expenses
For tax calendar years 2017 and 2018, taxpayers who itemize can deduct medical and dental expenses that exceed 7.5% of their adjusted gross income. After 2018, the limit increases to 10%. Taxpayers who do not itemize may be able to deduct their contributions to a health savings account. Amounts paid into a flexible spending arrangement or health reimbursement arrangement may be excluded from income.
State and Local Taxes
Total deduction for this section of Schedule A is limited to $10,000 each year. Taxes included are:
- State and local income tax or sales tax
- Real estate taxes
- Personal property taxes
- Foreign income taxes
Interest
- Home mortgage interest
- Prior to 2018, taxpayers could deduct interest on up to $1,000,000 in home acquisition indebtedness which is debt used to purchase or substantially improve a primary or secondary residence.
- Prior to 2018, taxpayers could also deduct interest on home equity debt up to $100,000.
- TCJA lowered the home acquisition debt limit to $750,000 and eliminated the home equity debt interest deduction unless the home equity loan proceeds were used to buy, build, or substantially improve a primary or secondary residence.
- Home mortgages incurred before December 15, 2017 are not subject to the new provisions of the TCJA.
- Investment Interest: The TCJA did not make any changes to the deduction for investment interest.
Gifts to Charity
- The TCJA increased the limit on cash contributions to certain charities from 50% of the taxpayer’s adjusted gross income to 60%.
Casualty and Theft Losses
- Personal casualty and theft losses are no longer deductible unless the loss is attributable to a federally declared disaster.
Miscellaneous Itemized Deductions
- Prior to the passage of the TCJA, taxpayers could deduct miscellaneous itemized deductions that exceed 2% of their adjusted gross income. Miscellaneous itemized deductions include unreimbursed employee expenses and investment expenses such as:
- Dues paid to professional societies
- Subscriptions to professional journals
- Tools and supplies used for an employee’s work
- Union dues and expenses
- Work clothes and uniforms if required and not suitable for everyday use
- Work related education costs
- Expenses for unreimbursed travel and mileage
- IRA custodial fees
- Advisory management fees
- Tax preparation fees
- Safe deposit box fees
- The TCJA suspended all miscellaneous itemized deductions from 2018 through 2025.
Though this may seem overwhelming, the changes are not as widespread is it first seems. If you have questions about how these changes will affect your 2018 taxes or if you’d like to work with a financial professional to ensure your taxes are filed correctly, please reach out! I’d love to help.
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.
