Posted by BRIAN PRZYSTUP & ASSOCIATES LLC

Changes to itemized deductions: What you can and cannot deduct under the new law

Changes to itemized deductions: What you can and cannot deduct under the new law

Whispers have arisen over the years of changing relating to what individuals can deduct as listed deductions. In December 2016, the Congressional Budget Office published a study on the effect of eradicating or decreasing the tax benefits related to the deductions. The report argued one primary reason to reduce or get rid of them was an inefficient allocation of economic resources. The Budget Office suggests that the availability of the deductions stimulated taxpayers to spend more on deductible activities to get the tax advantages. In the argument for itemized deductions, the Budget Office noted that the deductions were intended to yield a measure of taxable income that was associated with the taxpayer’s ability to pay taxes

Standard deduction

The new tax law enlarged the standard deduction for taxpayers filing Form 1040. The standard deduction amounts launch in the 2018 tax year is:

  • Single filing $12,000
  • Head of household filing $18,000
  • Married filing joint $24,000

The expectation is that via the increased standard deduction and changes meted to listed deductions, fewer taxpayers will lay claim on listed deductions. 

Changes in the Itemized Deduction

So, what has changed in the new deduction for you and are there any possible responses?

Taxes

The deduction for taxes is considered the itemized deduction that has gotten the most press coverage of all deductions. The previous tax law permitted a deduction for state and local income tax, real and personal property tax having no limit. Tax years starting after December 31, 2017, and prior January 1, 2026, the deduction for taxes has a limit of $10,000 ($5,000 for married and filing separately). The new law also removes the deduction for any property taxes made on foreign real property.

Medical expenses

The TCJA made available some relief for the deduction of medical expenses. The floor before the tax act in 2017 was 10% of Adjusted Gross Income (AGI). For example, if had AGI of $100,000 and your medical expenses for the year were $12,000, you would be permitted an itemized deduction for $2,000 of medical expenses. The amount that exceeded 10% of your AGI, which in this case is $10,000, represented your deductible medical expense. The new tax law decreased the percentage of AGI to 7.5% for tax years 2017 and 2018.

The fact concerning the medical deduction is that most taxpayers’ unreimbursed medical expenses did not go beyond the floor and accordingly, they were eligible to claim a medical deduction. While the TCJA decreased the floor, it is still likely most taxpayers will get any additional itemized deduction related to their medical expenses.

The changing health insurance market has brought about many taxpayers having high deductible plans. For qualifying taxpayers, a health savings account should be an option. The health savings account is a trust established for the sole aim of paying for qualified medical expenses of the beneficiary of the report. Contributions made to the plan may be deductible as an above line deduction if payment were made outside of the employment context, or part of a cafeteria plan, if offered by your employer. The employee does not include employer contributions to the health savings account.

Charitable Contributions

The old tax law allowed charitable contributions to be removed based on the organization to the extent that your donations did not go beyond 20%, 30% or 50%of your AGI. Increases have been made by the TCJA on the limitation for cash contributions to 60% for public charities and some private foundations of AGI for tax years commencing after December 31, 2017, and prior January 1, 2026. Cash contributions that surpass the 60% limitation can be brought forward and subtracted for up to five years.

The novel law does not permit a charitable deduction for any payment to an institution of higher education, where in exchange, the taxpayer gets the right to buy tickets at an athletic event. Previously, 80% of the payment could be removed as a charitable contribution, as long as it met particular conditions.

Miscellaneous itemized deductions

 There will be no more miscellaneous itemized deductions that surpassed 2% of your AGI. Items like employee business expenses, investment advisory fees, employee business expenses, tax preparation fees, and union and professional dues are some of the more common things that were categorized as a miscellaneous listed deduction.

Interest on Home Mortgage 

Individual taxpayers consider the deduction on a mortgage a revered deduction. The former law permitted taxpayers to subtract the interest in procurement indebtedness of $1million. Additionally, the interest on home fairness indebtedness was deductible on $100,000 of home equity debt. Currently, mortgages after December 15, 2017, has the deduction for acquisition indebtedness limited to essential debt of $750,000 and $375,000 for married filing separately. The new law deferred the deduction for interest on home equity indebtedness.

BRIAN PRZYSTUP & ASSOCIATES LLC
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