It’s Tax Filing Time – What’s Happening to My Itemized Deductions?
By Gary Rose, Partner, Tax & Business Services & Jennifer Chang, Supervisor, Tax & Business Services
Many of the sweeping changes to individual and business income taxes contained in the Tax Cuts & Jobs Act of 2017 (Act) are effective for 2018. To refresh your understanding of some of the key individual income tax changes, we have summarized some of the differences between the old and new laws related to itemized deductions, below.
With the elimination of some categories of deductions and limitations imposed on others, and with the increases to the standard deduction for 2018, fewer taxpayers will be itemizing on their 2018 Form 1040. As a result, tax document-gathering burdens might be lessened as the journey towards the April 15, 2019, filing deadline approaches.
Highlights of the changes to itemized deductions:
| Itemized Deduction | Pre-Reform Law | Tax Cuts & Jobs Act |
|---|---|---|
| Medical Expenses* | Limited to amount exceeding 10% of Adjusted Gross Income (AGI) [7.5% of AGI for taxpayers over the age of 65]. For Alternative Minimum Tax (AMT) purposes, same 10% of AGI limit. | For tax years beginning after 12/31/16 and ending before 01/01/2019, the deduction is limited to amounts exceeding 7.5% of AGI for all taxpayers. For AMT purposes, the 10% limit rule no longer applies. |
| State & Local Taxes | Taxpayers can deduct state & local income and property taxes paid, or state & local sales tax paid, instead of income tax paid. | For tax years beginning after 12/31/17 and ending before 01/01/2026, individuals can deduct state & local sales, income or property taxes up to $10,000 ($5,000 if married filing separate (MFS)). Foreign real property taxes not related to a trade or business activity are not deductible. |
| Mortgage Interest | Interest paid on a mortgage secured by a principal or second residence is deductible on mortgage loans up to $1 million ($500,000 MFS) of acquisition indebtedness and $100,000 in home equity indebtedness. For AMT purposes, the home equity deduction is disallowed. | For tax years beginning after 12/31/17 and ending before 01/01/2026, the underlying mortgage indebtedness limit is lowered to $750,000 ($375,000 MFS) on loans incurred after 12/15/2017.** There is no longer a deduction permitted related to interest paid for home equity loans. |
| Charitable Contribution | Contribution deductions are limited, depending on the type of charitable organization and type and purpose of the contribution, to 50%, 30%, or 20% of AGI. Contributions of $250 or more need contemporaneous written acknowledgments from the donee organization, unless the donee organization files a return reporting the donation. | For tax years beginning after 12/31/17 and ending before 01/01/2026, the 50% AGI limit for cash contributions to public charities and certain private foundations has been raised to 60% of AGI. Any amount exceeding the 60% AGI limit will be carried-forward for up to 5 years. The exception to the requirement for contemporaneous written acknowledgments has been repealed for tax years beginning after 12/31/2016. |
| Amounts Paid to Higher Education Institutions in Exchange for Rights to Purchase Tickets to an Athletic Event | 80% of certain payments to institutions of higher education in exchange for rights to purchase event tickets are deductible as charitable contributions. | For tax years beginning after 12/31/17, no charitable deduction is allowed for such payments. |
| Casualty and Theft Losses | Personal losses not connected with trade or business activity or any activity entered into for profit, such as property losses from fire, theft or other casualty, can be claimed as an itemized deduction. | For tax years beginning after 12/31/17 and ending before 01/01/2026, personal casualty losses are limited to losses incurred due to federally declared disasters. |
| Miscellaneous Itemized Deductions (subject to 2% floor) | Certain expenses such as tax preparation fees, investment broker fees, and others are deductible to the extent the aggregate exceeds 2% of AGI. | For tax years beginning after 12/31/17 and ending before 01/01/2026, all miscellaneous itemized deductions are suspended. |
**Mortgage Interest: If a binding written contract entered into before 12/15/2017, to close on the purchase of a principal residence before 01/01/2018, and the residence is purchased before 04/01/2018, the indebtedness will be considered to be incurred before 12/15/2017 (subject to the $1 million limit). Also, refinancing of qualified residence indebtedness incurred before 12/15/2017 will continue to be subject to the $1 million ($500,000 MFS) limitation so long as the resulting debt does not exceed the original indebtedness.
Further Changes to Note
In addition to the deduction-specific changes listed above, the Act has suspended the “Pease limitation” for tax years beginning after 12/31/17 and ending before 01/01/2026. This limitation affected high-income taxpayers by reducing their allowable itemized deductions by 3% of their AGI exceeding certain thresholds.
For more information on the individual tax law changes or on other components of the Tax Cuts and Jobs Act, please contact your Marcum advisor.
