The Tax Cuts and Jobs Act (TCJA) has reduced most income tax rates and has expanded on some tax breaks, it still has limits. It has eliminated several itemized deductions that have been valuable to several individual taxpayers.
There are five deductions that most will see lower or disappear from your 2018 income tax return:
State and local tax deduction. For tax years 2018 through 2025, your total itemized deductions for state and local taxes together (including your property taxes) are limited to $10,000. It is $5,000 if you are married and filing separately.
Mortgage interest deduction. For tax years 2018 through 2025, the TCJA has reduced the mortgage debt limit from $1 million to $750,000 for debt that has incurred after December 15, 2017, with some limited exceptions. You are able to claim an itemized deduction for interest expense paid on mortgage debt incurred on the purchase or construction/improvement to your home and/or a second residence. With points, sometimes called loan origination points or discount points, you make an upfront payment to get a lower interest rate from the lender. The points you paid related to the acquisition of your principal residence may be deductible in full in the year of home purchase. Tax law treats home purchase mortgage points differently from refinance mortgage points. Refinance loan points will get deducted over the life of your loan.
Home equity debt interest deduction. Prior to the TCJA, an itemized deduction could be claimed on interest up to $100,000 of home equity debt used for any purpose. An example is paying off personal credit cards of which the interest isn’t normally deductible. The TCJA significantly limits the home equity interest deduction for tax years 2018 through 2025 to only that debt (e.g., line of credit, home equity loan) that would qualify for the home mortgage interest deduction. Beginning in 2018, the proceeds from the equity line of credit has to be for home improvement purposes for the interest expense to be deductible.
Miscellaneous itemized deductions subject to the 2% floor. For tax years 2018 through 2025, miscellaneous tax deductions are suspended. Examples are: certain professional fees, investment advisory expenses, union dues, safety deposit box and unreimbursed employee business expenses. If you are a “work from home” employee, this includes the home office deduction. Some business owners and self-employed may still be able to claim a home office deduction against their business or self-employment income (claim these business deductions on Schedule C).
Personal casualty and theft loss deduction. For tax years 2018 through 2025, this deduction is suspended. The exception is if the casualty loss was due to an event that was officially declared a disaster by the President (Go to fema.gov for a list of qualifying disaster areas).
There are additional rules and limits that apply to many of the deductions listed. As we have noted in prior blog posts, the TCJA has nearly doubled the standard deduction. With the reduction or elimination of many itemized, you likely will benefit in taking the standard deduction for your 2018 individual tax return.
Please contact your Wegner CPAs tax expert to answer your questions and give you the best option for your 2018 tax filing.