By Jim Probasco
Jan. 7, 2019
By nearly doubling the standard deduction and eliminating (or limiting) many itemized deductions, the Tax Cuts and Jobs Act (TCJA) has made it more likely that many people who used to itemize on Schedule A will now take the standard deduction instead.
Before you decide what you should do, review this list of exemptions and deductions that have been eliminated, along with a few deductions and tax credits that have been newly limited, reduced or improved by passage of the TCJA.
Exemptions and deductions reduce taxable income. Tax credits are subtracted from the taxes you owe. All three of these elements have been impacted by the TCJA and each affects the amount you pay in a different way. For example, if your adjusted gross income (AGI) is $100,000, you owe $18,289.50 in taxes. A $10,000 deduction (or exemption) would reduce your AGI to $90,000 resulting in a tax bill of $15,889.50. With a tax credit of $10,000, your AGI would remain at $100,000, but your taxes would be just $8,289.50 – the amount you get by subtracting $10,000 from $18,289.50.
Personal and dependent exemptions are going away. While an exemption is not technically a deduction, it functions the same way by allowing you to reduce your taxable income by the amount of the exemption. In this case, say the exemption was $4,050 for yourself and for each dependent you claim. Now it is $0.
The TCJA doubles the child tax credit (CTC) from $1,000 to $2,000 for those who qualify, including parents with higher incomes than in the past. Income thresholds for 2018 are $200,000 for single parents and $400,000 for those married filing jointly. The child tax credit is refundable, which means that even if you don’t owe taxes due to low income you can still receive a partial credit, providing (or increasing) a refund. Remember, this is a tax credit so, unlike a deduction, which reduces taxable income, this comes directly off the taxes you owe. In addition, a new $500 tax credit is available for dependents age 17 and older.
The TCJA raises the standard deduction for 2018 from $6,350 to $12,000 for individuals and to $24,000 (from $12,700) for married couples filing jointly. The standard deduction for those filing as head of household will rise from $9,550 to $18,000. (Seniors who are age 65 or older get an extra $1,600 beyond the standard deduction as single or head-of-household filers or $1,300 per spouse for married filing jointly – $2,600 if both are 65 or older.)
Because of this, you may discover that the new standard deduction is larger than the combined total of your itemized deductions. In fact, the Joint Committee on Taxation has estimated that the number of taxpayers who itemize will fall from 46.5 million last year to slightly more than 18 million this year, meaning about 88% of all filers are expected to take the standard deduction. What follows is a closer look at how Schedule A itemized deductions have changed with the TCJA. Where we can, there are also some suggestions for what to do instead.
In the past your employer could reimburse you up to $20 a month ($240 annually) for bicycle commuting expenses tax free. In addition, your employer could take a deduction for offering the benefit. The TCJA suspended that benefit for both bike commuters and their employers. It also removed employer deductions for parking, transit and carpooling.
Commuting expenses considered “necessary for ensuring the safety of the employee” will continue to be deductible by employers, but the TCJA doesn’t spell out which expenses qualify and the IRS has offered no real guidance to date.
As an employee you can continue to receive tax-free parking, transit and vanpooling benefits of up to $260 per month from your employer, but since companies no longer receive a deduction for offering the benefit most have little incentive to offer it. Your employer can also offer bicycle-commuting benefits in any amount, but that benefit will now be taxable to you.
Costs associated with relocating for a new job used to be deductible on Form 1040 as an above the line deduction (which you could subtract from your gross income to calculate your AGI), but no longer. The distance you are moving doesn’t matter. Moving expenses are simply not deductible, with one exception.
If you are active duty military and moving for a service-related reason, the deduction still applies.
In the past the person making alimony payments received an above-the-line deduction and the person receiving the alimony counted the money as taxable income. Effective in 2019 for any divorce that happens after Dec. 31, 2018, the paying spouse will no longer receive a deduction and the receiving spouse will no longer have to declare the payments as taxable income. Payments initiated before 2019 are not affected. Child support payments are different. They are nondeductible by the paying spouse and tax-free to the recipient.
One suggested tactic for the paying spouse involves giving the receiving spouse a lump-sum IRA. This effectively provides the paying spouse with a deduction since they are giving away money they would have had to pay taxes on eventually. The receiving spouse would be responsible for taxes upon withdrawal (including a 10% penalty if they take money out before age 59½) but would have the benefit of tax-free growth until withdrawing funds. The transfer of the IRA account is tax free. Obviously, this would not work if the receiving spouse needs money right away.
The deduction for medical expenses is not going away, and for 2018 you can deduct unreimbursed medical expenses that exceed 7.5% of your AGI on Schedule A, just like last year. However, this deduction will be subject to a 10% of AGI threshold for tax year 2019.
It's too late. To take advantage of the 7.5% threshold before it went up to 10%, you would have had to schedule elective medical procedures before the end of 2018. Keep in mind that the medical expense must be deductible. Most cosmetic surgeries, for example, are typically not.
The Schedule A deduction for state and local taxes (SALT) used to be unlimited. These include income taxes (or general sales taxes), real estate and personal property taxes. With passage of the TCJA, the SALT deduction is now limited to $10,000 ($5,000 if married filing separately). This can be a real problem for people in states with high income or property taxes such as Florida, New York and California.
A few high-tax states have filed lawsuits challenging the legality of the SALT cap. Others are looking into ways to offset the restriction on this deduction by allowing residents to make contributions to a state charitable fund in lieu of taxes, although the IRS has proposed new guidelines that would remove that benefit. Connecticut and New York have proposed workarounds that involve a tax on pass-through entities or a deductible payroll tax, both of which take advantage of the fact that businesses have no cap on deducting state and local taxes. Whether any of these tactics will work remains to be seen.
At least one expert has opined that foreign property taxes may now be considered a deductible qualified housing expense on Form 2555, Foreign Earned Income, for purposes of the foreign housing exclusion for certain U.S. citizens or residents who live outside the United States and earn wages abroad. Caution: This deduction involves an interpretation of tax law. Don't attempt to use it without consulting a qualified tax expert.
In the past you could deduct interest on a mortgage of up to $1 million. Beginning this year, the limit is $750,000 ($375,000 if married and filing separately). Since you can only take this deduction if you file Schedule A and itemize, the change may not matter to many people who will elect to take the standard deduction anyway. In fact, Zillow anticipates that just 14% of homeowners will claim the mortgage deduction in 2018. Previously, 44% claimed it.
If your loan originated on or before Dec. 15, 2017, you may still deduct interest on the old $1 million amount ($500,000 for married taxpayers filing separately).
Previously, you could deduct interest on a home equity loan and home equity line of credit (HELOC) just as you could with a mortgage, no matter how you used the money. This deduction is going away – at least in part. Beginning in 2018, you cannot deduct interest on these types of loans, except under certain circumstances, even if you took out the loan before this year.
If you have or take out a home equity loan or line of credit and use the money to “buy, build or substantially improve” your main or second home, the interest may still be deductible. Note that, to take the deduction, the home equity loan must be on the property you are renovating. You can't take out a home equity loan on your city apartment to finance fixing up your ski house. You can also refinance an existing mortgage and deduct the interest, provided the refinanced amount isn’t greater than your old loan balance (in other words, you are not taking any cash out).
Though it’s not specifically related to the TCJA, the Schedule A deduction for mortgage insurance premiums (MIP/PMI) expired at the end of 2017.
It’s possible Congress will reinstate this deduction for 2018 as it has in the past. To find out, check at IRS.gov/Schedule A before filing your taxes.
The comprehensive Schedule A deduction for casualty and theft losses has gone away following passage of the TCJA. In the past you could deduct losses related to a disaster or theft to the extent that those losses were not covered by insurance or disaster relief.
The deduction is still available if you live in a presidentially designated disaster zone. Often these designations are made county-by-county, so even if the county next to you is a federally declared disaster area, your county may not be.
Miscellaneous Schedule A itemized deductions subject to a 2% of AGI threshold have gone away beginning in 2018. This includes deductions in the following categories:
• Unreimbursed job expenses. These are work-related expenses you paid out of your own pocket and include travel, transportation and meals, union and professional dues, business liability insurance, depreciation on office equipment, work-related education, home office expenses, costs of looking for a new job, legal fees, work clothes and uniforms. All of these are gone.
How to fight back. Your best recourse is to ask your employer to reimburse you for these expenses. Any reimbursement will be tax free. You could also seek a raise, but that would be taxable.
• Investment expenses. These are fees for investment advice or management, tax or legal advice, trustee fees (i.e., to manage IRAs or other investments) or rental fees for a safe deposit box.
How to fight back. Although the items above are no longer deductible, if you borrow money to buy an investment, interest on that loan (called investment interest) is deductible if you itemize. The deduction is limited to the amount of taxable investment income you earn for the year.
• Tax preparation fees. These include the cost of tax preparation software, hiring a tax professional or buying tax publications. Also gone are deductions for electronic filing fees and fees you pay to fight the IRS, including attorney fees, accounting fees or fees you pay to contest a ruling or claim a refund.
How to fight back. If you hire someone to prepare both your personal and business taxes, ask for a separate bill for each. Fees you pay to prepare your business return are fully deductible as a business expense.
• Hobby expenses These expenses, up to the amount of income you earned each year, are no longer deductible even though you do have to report (and pay taxes on) any income you earn from your hobby.
How to fight back. If you sell goods related to your hobby to customers, you can deduct the cost of those goods when calculating hobby-related income.
A few miscellaneous itemized deductions remain for 2018 and beyond.
Gambling losses are still deductible under the TCJA up to the amount of your winnings for the year. Gambling losses are not subject to the 2% limit on miscellaneous itemized deductions.
Graduate student tuition waivers remain tax free.
Interest on student loans continues to be tax deductible, even if you don’t itemize deductions.
The $250 deduction for classroom teachers is still in effect and available, even if the teacher doesn’t itemize.
The standard mileage rate deduction for 2018 for medical reasons is 18 cents per mile and the rate for charity remains the same at 14 cents per mile.
Along with the new standard deduction, several others are better under the TCJA.
The estate tax exemption has increased from $5.49 million for individuals and $10.98 million for married couples to nearly $11 million for individuals and almost $22 million for couples.
Student loan debt discharge due to death or disability will not be taxed beginning in 2018. Previously, discharged debt due to disability or death was taxable to you or to your estate.
There is no limitation on itemized deductions based on AGI starting this year, although other limitations may be imposed, depending on the deduction.
Charitable contributions now include higher limit thresholds. Most gifts by cash or check can be up to 60% of your AGI versus the previous limit of 50%. In addition, the TCJA repeals the Pease limitations for both charitable donations and the home mortgage interest deduction, which reduced itemized deductions for high income individuals.
Whether deductions eliminated by the TCJA or other changes have a negative impact on you depends on your personal financial situation and the types and amounts of deductions you might be able to take. It’s worth noting that the changes implemented by this legislation are currently set to expire after Dec. 31, 2025, unless Congress decides to extend them. For more on this see the IRS publication Tax Reform Basics for Individuals and Families.