Changes to Itemized Deductions – What You Need to Know

January 31, 2019

As the 2018 tax filing season begins, one of the major changes that will be seen by taxpayers is the increase to the standard deduction as well as the treatment of certain itemized deductions. The Tax Cuts and Jobs Act (“TCJA”) overhauled the standard deduction, increasing the amount to $12,000 for individual taxpayers and $24,000 for taxpayers married filing jointly. A taxpayer is entitled to either the standard deduction or total itemized deductions, whichever is higher. The large increase to the standard deduction, coupled with various changes to itemized deductions, will result in an increase in taxpayers taking the standard deduction. For taxpayers still itemizing their deductions, however, it is important to be aware of some of the changes. This article gives a brief overview of some of the changes to itemized deductions and how they might affect your tax situation.

Limitation of State and Local Taxes

One of the biggest changes to itemized deductions under the TCJA was the limit placed on State and Local Taxes (“SALT”). Previously, taxpayers could deduct the full amounts paid for state income taxes, personal property taxes, and real estate taxes. Under the TCJA, the total amount of SALT allowed for purposes of itemizing deductions is capped at $10,000—any amount over this limit is not deductible.

Changes to Mortgage Interest

Although mortgage interest is still deductible, there are a couple of new limitations in place under the TCJA. First, only the mortgage interest attributable to the first $750,000 of mortgage indebtedness is deductible; previously, mortgage interest on the first $1,000,000 of mortgage indebtedness was deductible. Additionally, a change was instituted for the interest incurred on a Home Equity Line of Credit (“HELOC”). Interest paid toward a HELOC was deductible for any purpose under old tax laws, but now this interest is only deductible if the proceeds from the HELOC were used to buy, build, or improve your home.

Miscellaneous Itemized Deductions

Under previous tax law, certain miscellaneous expenses were allowed as a deduction once the expenses exceeded 2% of adjusted gross income (“AGI”). These miscellaneous expenses included items such as unreimbursed employee expenses, tax preparation fees, investment management fees, and other miscellaneous expenses. The TCJA has eliminated the deductibility of miscellaneous expenses that were previously allowed once the expenses exceeded 2% of AGI.

Medical Expenses, Charitable Contributions, and Income Limitations

The majority of the changes to itemized deductions may seem negative, but there are several new components of itemized deductions that are advantageous for certain taxpayers. One of the positive changes for taxpayers is that medical expenses exceeding 7.5% of AGI are deductible; previously, only medical expenses exceeding 10% of AGI were deductible. Another positive change for taxpayers is that charitable contributions are now deductible for up to 60% of your AGI, up from the previous limit of 50%. Additionally, there is no longer a reduction in itemized deductions once income reaches a certain level. For high earners who still itemize their deductions, this should provide an additional benefit.

Questions About Itemized Deductions?

Although the new rules surrounding itemized deductions aren’t overly complex, there are many circumstances that may affect your specific tax situation. If you have any questions or would like further information regarding changes to itemized deductions or any tax related matter, please contact one of Hoffman Clark’s consultants.