As you are probably aware, Tax Reform has passed both the House and Senate, which means major changes in preparing tax returns next year. Significant changes have been made to Itemized Deductions found on Schedule A of your federal return. These changes may or may not have affected you before, but perhaps they are areas of spending you may want to think about in the coming year. Please note I will refer to the current tax law as the “previous” tax law and will refer to the newly passed tax bill as the “new” tax law. In addition, all numbers cited are for taxpayers filing joint returns.
Medical & Dental Expenses
Formerly, individuals could deduct unreimbursed medical expenses only to the extent such expenses exceed, in the aggregate, 10% of their Adjusted Gross Income (AGI).
Under the provisions of the new tax bill, for 2017 and 2018, the threshold will be 7.5%, making it easier for individuals to meet this threshold amount.
State & Local Income/Property Taxes
Pursuant to our previous tax laws, taxpayers were permitted to deduct state, local, and foreign income taxes, as well as state and local property taxes on their federal return, which for folks in some states, was a significant deduction.
Under the new tax laws, the deduction for these items is cumulatively capped at $10,000. Therefore, if your property taxes are $8,000, and state income taxes are $20,000, you will be limited to a total deduction of $10,000.
Home Mortgage Interest
Previously, homeowners could deduct interest on up to $1 million of Acquisition Indebtedness (generally all debt incurred in the purchase, construction, and improvement of the home), as well as interest on an additional $100,000 in Home Equity Indebtedness (i.e. HELOC) on a taxpayer’s principal residence and one other residence.
Under the new law, and for the tax years 2018 through 2025, taxpayers are limited in their deduction to the interest on up to $750,000 of Acquisition Indebtedness; deductions for interest on Home Equity Indebtedness are no longer available.
However, if you “acquire” your home prior to December 15, 2017, you can still deduct interest on up to $1 million of Acquisition Indebtedness, but can no longer deduct any interest on Home Equity Indebtedness.
Charitable Contributions
Under previous tax laws, individuals could deduct cash contributions to certain charitable and other organizations up to 50% of their AGI (subject to certain requirements including maintaining substantiating documentation). In addition, while deductions are generally disallowed in this area when the donor receives a substantial benefit in return for his/her contribution, an exception exists for contributions to a higher education institution in exchange for the right to purchase tickets to an athletic event (deduction limited to 80% of the total contribution).
Now, under our new tax system, individual taxpayers can deduct cash contributions up to 60% of their AGI (up from 50%), but there is no longer a deduction available when the right to purchase athletic tickets is given in exchange for the contribution. Furthermore, the new tax laws repeal a narrow exception to the requirement to maintain substantiation for charitable donations, making it more important to collect and safeguard appropriate documentation in the future.
Casualty/Theft Losses
Previously, a taxpayer could claim a deduction for any loss sustained that was not covered by insurance and was either (1) incurred in a trade, business, or other profit-seeking activity, or (2) consisted of property losses arising from fire, storm, shipwreck, other casualty, or theft. This deduction was limited, however, in that only losses in excess of 10% of the individual’s AGI could be deducted.
Now, for tax years 2018 through 2025, a taxpayer can claim a deduction for personal property casualty loss, subject to current limitations, only if the loss was attributable to a disaster declared by the President.
Miscellaneous Itemized Deductions
Under our former tax laws, individuals could deduct certain expenses to the extent they exceeded 2% of their AGI. These expenses include (1) expenses incurred in the production or collection of income (investment expenses, including one’s share of such expenses from pass-through entities), (2) tax preparation expenses, and (3) unreimbursed expenses attributable to the trade or business of being an employee (unreimbursed employee business expenses).
Under our new laws, all miscellaneous itemized deductions are suspended; they will be unavailable as a deduction for 2018 through 2025.