This is part 4 in a 5 part series about the Tax Cuts & Jobs Act.
One of the most significant provisions in the new tax law is the dramatic increase in the standard deduction. This change alone will simplify tax filings for many taxpayers. However, for taxpayers who will still be claiming the itemized deductions, there are several key changes that will impact 2018 taxes.
Phase-out of Itemized Deductions is Suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limitation” on overall itemized deductions is suspended. Previously married filing jointly taxpayers would begin to lose some of their itemized deductions when their adjusted gross income exceeded $313,800.
New Limitations on Mortgage Interest
Beginning in 2018, home equity loan interest will no longer be deductible. The deductible mortgage interest will be defined as acquisition indebtedness: debt for acquiring, constructing, or substantially improving your home. So refinancing a home equity loan into a primary mortgage may not result in the full mortgage being deductible if the debt on the equity loan was related to consumer debt outside the definition of acquisition indebtedness. For mortgages after December 15, 2017, the cap on the mortgage interest is based on a $750,000 mortgage (previously $1,000,000).
Limitation on Deduction of State and Local Taxes
Under the new plan, taxpayers who itemize will be able to deduct their state individual income, sales and property taxes up to a limit of $10,000 in total starting in 2018. This only applies to taxes related to personal assets which would include property taxes on a residence or sales tax on the purchase of a personal use automobile. Property taxes related to rental properties are not subject to the cap and can still be deducted.
Miscellaneous Itemized Deductions have been Suspended
These are the deductions that have historically been limited by 2% of adjusted gross income. Some examples would be investment advisor fees, unreimbursed employee expenses, tax preparation fees, etc. For most taxpayers, this will have little to no impact on overall taxes since the deductible portion was the amount of the 2% threshold. These are suspended through 2025.
Medical Expense Deduction Threshold Temporarily Reduced
For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshold on medical expense deductions is reduced to 7.5% of adjusted gross income (AGI) for all taxpayers.
Charitable Contribution Deduction Limitation Increased
For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% adjusted gross income limitation for an individual’s cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling.
Elimination of Donation for Seating Rights
For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payer receives the right to purchase tickets or seating at an athletic event.
Deduction for Personal Casualty and Theft Losses Suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a federally-declared disaster.
The combination of these changes may reduce your itemized deductions below the new standard deduction amount, be sure to consider this when planning for 2018.
If you are interested in learning more about the new tax reform, please join us for a tax update seminar. More details can be found at this link.